
Mai] 



.6* 



/&• 



ROBERT BEALL, 

Bookseller and Stationer, 

405 Pennsylvania Avenue, 

■Washington. D. C. 




Glass. 
Book_ 



THE MONEY MARKET. 



LOMBARD STREET: 



A DESCRIPTION OF THE HONEY MARKET 



BY 

WALTER BAGEHOT. 

n 



NEW YORK: 

Scribner, Armstrong & Co. 

1374. 









Stereotyped at the 

Women's Printing House 

"os. 5 6, 58, and 60 Park Street, 

New York. 



John F. Trow & Son, 

Printers and Bookbinders, 

205-213 East xzth St., 

NEW YORK. 



ADVERTISEMENT. 



-:0:- 



Tiie composition of this little book has occupied 
a much longer time than, perhaps, my readers may 
think its length or its importance deserves. It 
was begun as long ago as the autumn of 1870 ; 
and though its progress has been often suspended 
by pressing occupations and imperfect health, I 
have never ceased to work at it when I could. 
But I fear that in consequence, in some casual 
illustrations at least, every part of the book may not 
seem, as the lawyers would say, i to speak from the 
same time/ The figures and the examples which 
it is most natural to use at one time are not quite 
those which it is most natural to use at another ; 
and a slowly written book on a living and chang- 
ing subject is apt a little to want unity in this 
respect. 

I fear that I must not expect a very favourable 
reception for this work. It speaks mainly of foui 



vi AD VER TISEMENT. 

sets of persons — the Bank of England, Joint Stock 
Banks other than that Bank, private bankers, and 
bill-brokers ; and I am much afraid that neither will 
altogether like what is said of them. I can only 
say that the opinions now expressed have not been 
formed hastily or at a distance from the facts ; that, 
on the contrary, they have been slowly matured in 
1 Lombard Street ' itself, and that, perhaps, as they 
will not be altogether pleasing to anyone, I may 
at least ask for the credit of having been impartial 
in my criticism. 

I should also say that I am indebted to a friend 
for the correction of the final proof sheets, which 
an attack of illness prevented me from fully re- 
vising. If it had not been for his kind assistance, 
the publication of the book must have been post- 
poned till the autumn, which, as its production has 
already been so slow, would have been very 
annoying to me. 

Walter Bagehot. 

The Poplars, Wimbledon. 
April 26 ■, 1S73. 



CONTENTS. 



CHAP. PAG1 

I. INTRODUCTORY I 

II. A GENERAL VIEW OF LOMBARD STREET . . .21 

III. HOW LOMBARD STREET CAME TO EXIST, AND WHY 

IT ASSUMED ITS PRESENT FORM . . . * 75 

IV. THE POSITION OF THE CHANCELLOR OF THE EXCHE- 

QUER IN THE MONEY MARKET . . . . IOI 

V. THE MODE IN WHICH THE VALUE OF MONEY IS 

SETTLED IN LOMBARD STREET . . . . II3 

VI. WHY LOMBARD STREET IS OFTEN VERY DULL, AND 

SOMETIMES EXTREMELY EXCITED . . . .122 

VII. A MORE EXACT ACCOUNT OF THE MODE IN WHICH 
THE BANK OF ENGLAND HAS DISCHARGED ITS 
DUTY OF RETAINING A GOOD BANK RESERVE, AND 
OF ADMINISTERING IT EFFECTUALLY . . . 160 

VIII. THE GOVERNMENT OF THE BANK OF ENGLAND . . 208 
IX. THE JOINT STOCK BANKS 243 



viii CONTENTS. 

CHAP. PAGH 

X. THE PR7VATE BANKS 267 

XI. THE BILL-BROKERS 281 

XII. THE PRINCIPLES WHICH SHOULD REGULATE THE 

AMOUNT OF THE BANKING RESERVE TO BE KEPT BY 
THE BANK OF ENGLAND 30I 

XIII. CONCLUSION 329 



APPENDIX. 

NOTE A. LIABILITIES AND CASH RESERVE OF THE CHIEF 

BANKING SYSTEMS 335 

NOTE B. EXTRACT FROM EVIDENCE GIVEN BY MR. ALDER- 
MAN SALOMONS BEFORE THE HOUSE OF COM- 
MONS SELECT COMMITTEE IN 1858 . . . 337 

iTOTE C. STATEMENT OF CIRCULATION AND DEPOSITS OF 
THE BANK OF DUNDEE AT INTERVALS OF TEN 
YEARS, BETWEEN 1 764 AND 1 864 . . . 349 

NOTE D. MEETING OF THE PROPRIETORS OF THE BANK OF 

ENGLAND, SEPTEMBER 13, 1866 . . . 350 



LOMBARD STREET. 



CHAPTER L 

INTRODUCTORY. 

I venture to call this Essay ' Lombard Street/ 
and not the ' Money Market/ or any such 
phrase, because I wish to deal, and to show 
that I mean to deal, with concrete realities. A 
notion prevails that the Money Market is some- 
thing so impalpable that it can only be spoken of 
in very abstract words, and that therefore books 
on it must always be exceedingly difficult. But I 
maintain that the • Money Market is as concrete 
and real as anything else ; that it can be 
described in as plain words ; that it is the writers 
fault if what he says is not clear. In one respect, 
however, I admit that I am about to take per- 
haps an unfair advantage. Half, and more than 
half, of the supposed ' difficulty ' of the Money 



2 INTRODUCTORY. 

Market has arisen out of the controversies as to 
' Peel's Act/ and the abstract discussions on the 
theory on which that act is based, or supposed to 
be based. But in the ensuing pages I mean to 
speak as little as I can of the Act of 1844 ; and 
when I do speak of it, I shall deal nearly exclu- 
sively with its experienced effects, and scarcely at 
all, if at all, with its refined basis. 

For this I have several reasons, — one, that if . 
you say anything about the Act of 1844, it is little 
matter what else you say, for few will attend to it. 
Most critics will seize on the passage as to the 
Act, either to attack it or defend it, as if it were the 
main point. There has been so much fierce con- 
troversy as to this Act of Parliament — and there 
is still so much animosity — that a single sentence 
respecting it is far more interesting to very many 
than a whole book on any other part of the subject. 
Two hosts of eager disputants on this subject ask 
of every new writer the one question — Are you 
with us or against us ? and they care for little else. 
Of course if the Act of 1844 really were, as is 
commonly thought, the primum mobile of the 
English Money Market, — the source of all good 
according to some, and the source of all harm 
according to others,— the extreme irritation excited 
by an opinion on it would be no reason for not 



INTRODUCTORY. 3 

giving a free opinion. A writer on any subject 
must not neglect its .cardinal fact, for fear that 
others may abuse him. But, in my judgment, 
the Act of 1844 is only a subordinate matter 
in the Money Market ; what has to be said on it 
has been said at disproportionate length ; the 
phenomena connected with it have been magni- 
fied into greater relative importance than they at 
all deserve. We must never forget that a 
quarter of a century has passed since 1844, — a 
period singularly remarkable for its material 
progress, and almost marvellous in its banking 
development. Even, therefore, if the facts so 
much referred to in 1844 had the importance then 
ascribed to them, — and I believe that in some 
respects they were even then overstated, — there 
would be nothing surprising in finding that in a 
new world new phenomena had arisen which now 
are larger and stronger. In my opinion this is 
the truth: since 1844, Lombard Street is so 
changed that we cannot judge of it without 
describing and discussing a most vigorous adult 
world which then was small and weak. On this 
account I wish to say as little as is fairly possible 
of the Act of 1844, and, as far as I can, to isolate 
and dwell exclusively on the ' Post- Peel 9 agencies, 
so that those who have had enough of that well- 



4 INTRODUCTORY. 

worn theme (and they are very many) may not be 
wearied, and that the new and neglected parts of 
the subject may be seen as they really are. 

The briefest and truest way of describing Lom- 
bard Street is to say that it is by far the greatest 
combination of economical power and economical 
delicacy that the world has ever seen. Of the 
greatness of the power there will be no doubt. 
Money is economical power. Everyone is aware 
that England is the greatest moneyed country in 
the world ; everyone admits that it has much 
more immediately disposable and ready cash than 
any other country. But very few persons are 
aware how much greater the ready balance — the 
floating loan-fund which can be lent to anyone 
or for any purpose — is in England than it is any- 
where else in the world. A very few figures will 
show how large the London loan-fund is, and 
how much greater it is than any other. The 
known deposits — the deposits of banks which 
publish their accounts — are, in 

£ 

London (31st December, 1872) . . . 120,000,000 
Paris (27th February, 1873) .... 13,000,000 
New York (February, 1873) .... 40,000,000 
German Empire (31st January, 1873) . . 8,000,000 

And the unknown deposits— the deposits in banks 
which do not publish their accounts — are in London 



INTRODUCTORY. 



5 



much greater than those in any other of these 
cities. The bankers' deposits of London are 
many times greater than those of any other city 
— those of Great Britain many times greater than 
those of any other country. 

Of course the deposits of bankers are not a 
strictly accurate measure of the resources of a 
Money Market. On the contrary, much more cash 
exists out of banks in France and Germany, and 
in all non-banking countries, than could be found 
in England or Scotland, where banking is devel- 
oped. But that cash is not, so to speak, l money- 
market money : ' it is not attainable. Nothing but 
their immense misfortunes, nothing but a vast loan 
in their own securities, could have extracted the 
hoards of France from the custody of the French 
people. The offer of no other securities would 
have tempted them, for they had confidence in no 
other securities. For all other purposes the money 
hoarded was useless and might as well not have 
been hoarded. But the English money is ' borrow- 
able ' money. Our people are bolder in dealing 
with their money than any continental nation, and 
even if they were not bolder, the mere fact that 
their money is deposited in a bank makes it far 
more obtainable. A million in the hands of a single 
banker is a great power ; he can at once lend it 



6 INTRODUCTORY. 

where he will, and borrowers can come to him, 
because they know or believe that he has it. But 
the same sum scattered in tens and fifties through 
a whole nation is no power at all : no one knows 
where to find it or whom to ask for it. Concen- 
tration of money in banks, though not the sole 
cause, is the principal cause which has made the 
Money Market of England so exceedingly rich, 
so much beyond that of other countries. 

The effect is seen constantly. We are asked 
to lend, and do lend, vast sums, which it would be 
impossible to obtain elsewhere. It is sometimes 
said that any foreign country can borrow in Lom- 
bard Street at a price : some countries can bor- 
row much cheaper than others ; but all, it is said, 
can have some money if they choose to pay 
enough for it. Perhaps this is an exaggeration ; 
but confined, as of course it was meant to be, 
to civilised Governments, it is not much of an 
exaggeration. There are very few civilised Gov- 
ernments that could not borrow considerable sums 
of us if they choose, and most of them seem 
more and more likely to choose. If any nation 
wants even to make a railway — especially at all a 
poor nation — it is sure to come to this country — 
to the country of banks — for the money. It is 
true that English bankers are not themselves 



INTRODUCTORY. 7 

very great lenders to foreign states. But they 
are great lenders to those who lend. They 
advance on foreign stocks, as the phrase is, with 
1 a margin ; ' that is, they find eighty per cent, 
of the money, and the nominal lender finds the 
rest. And it is in this way that vast works are 
achieved with English aid which but for that aid 
would never have been planned. 

In domestic enterprises it is the same. We 
have entirely lost the idea that any undertaking 
likely to pay, and seen to be likely, can perish for 
want of money ; yet no idea was more familiar 
to our ancestors, or is more common now in 
most countries. A citizen of London in Queen 
Elizabeth's time could not have imagined our 
state of mind. He would have thought that it 
was of no use inventing railways (if he could have 
understood what a railway meant), for you would 
not have been able to collect the capital with 
which to make them. At this moment, in 
colonies and all rude countries, there is no large 
sum of transferable money ;. there is no fund from 
which you can borrow, and out of which you can 
make immense works. Taking the world as a 
whole — either now or in the past — it is certain 
that in poor states there is no spare money for 
new and great undertakings, and that in most rich 



8 INTROD UCTOR V. 

states the money is too scattered, and clings toe 
close to the hands of the owners, to be often 
obtainable in large quantities for new purposes, 
A place like Lombard Street, where in all but the 
rarest times money can be always obtained upon 
good security or upon decent prospects of proba- 
ble gain, is a luxury which no country has ever 
enjoyed with even comparable equality before. 

But though these occasional loans to new en- 
terprises and foreign States are the most conspic- 
uous instances of the power of Lombard Street, 
they are not by any means the most remarkable 
or the most important use of that power. English 
trade is carried on upon borrowed capital to an 
extent of which few foreigners have an idea, and 
none of our ancestors could have conceived. Iv 
every district small traders have arisen, who ' dis- 
count their bills ' largely, and with the capital so 
borrowed, harass and press upon, if they do not 
eradicate, the old capitalist. The new trader has 
obviously an immense advantage in the struggle of 
trade. If a merchant have 50,000/. all his own, — 
to gain 10 per cent, on it he must make 5,000/. a 
year, and must charge for his goods accordingly ; 
but if another has only 10,000/., and borrows 
40,000/. by discounts (no extreme instance in our 
modern trade), he has the same capital of 50,000/, 



INTRODUCTORY. g 

to use, and can sell much cheaper. If the rate at 
which he borrows be 5 per cent., he will have to 
pay 2,000/. a year ; and if, like the old trader, he 
make 5,000/. a year, he will still, after paying his 
interest, obtain 3,000/. a year, or 30 per cent., on 
his own 10,000/. As most merchants are content 
with much less than 30 per cent., he will be able, 
if he wishes, to forego some of that profit, lower 
the price of the commodity, and drive the old- 
fashioned trader — the man who trades on his own 
capital — out of the market. In modern English 
business, owing to the certainty of obtaining loans 
on discount of bills or otherwise at a moderate 
rate of interest, there is a steady bounty on trad- 
ing with borrowed capital, and a constant dis- 
couragement to confine yourself solely or mainly 
to your own capital. 

This increasingly democratic structure of English 
commerce is very unpopular in many quarters, 
and its effects are no doubt exceedingly mixed. 
On the one hand, it prevents the long duration of 
great families of merchant princes, such as those of 
Venice and Genoa, who inherited nice cultivation as 
well as great wealth, and who, to some extent, com- 
bined the tastes of an aristocracy with the insight 
and verve of men of business. These are pushed 
out, so to say, by the dirty crowd of little men. After 



j o IN TROD UCTOR V. 

a generation or two they retire into idle luxury. 
Upon their immense capital they can only obtain 
low profits, and these they do not think enough to 
compensate them for the rough companions and 
rude manners they must meet in business. This 
constant levelling of our commercial houses is, 
too, unfavourable to commercial morality. Great 
firms, with a reputation which they have re- 
ceived from the past, and which they wish to 
transmit to the future, cannot be guilty of small 
frauds. They live by a contimiity of trade, which 
detected fraud would spoil. When we scrutinise 
the reason of the impaired reputation of English 
goods, we find it is the fault of new men with lit- 
tle money of their own, created by bank ' dis- 
counts.' These men want business at once, and 
they produce an inferior article to get it. They 
rely on cheapness, and rely successfully. 

But these defects and others in the democratic 
structure of commerce are compensated by one 
great excellence. No country of great hereditary 
trade, no European country at least, was ever so 
little ' sleepy/ to use the only fit word, as England ; 
no other was ever so prompt at once to seize new 
advantages. A country dependent mainly on great 
1 merchant princes ' will never be so prompt ; their 
commerce perpetually slips more and more into a 



INTRODUCTORY. 



II 



commerce of routine. A man of large wealth, how- 
ever intelligent, always thinks, more or- less — 'I 
have a great income, and I want to keep it. If 
things go on as they are I shall certainly keep it ; 
but if they change I may not keep it/ Conse- 
quently he considers every change of circumstance 
a \ bore/ and thinks of such changes as little as he 
can. But a new man, who has his way to make 
in the world, knows that such changes are his op- 
portunities ; he is always on the look-out for them, 
and always heeds them when he finds them. 
The rough and vulgar structure of English 
commerce is the secret of its life ; for it contains 
1 the propensity to variation/ which, in the 
social as in the animal kingdom, is the principle 
of progress. 

In this constant and chronic borrowing, Lom- 
bard Street is the great go-between. It is a sort 
of standing broker between quiet saving districts 
of the country and the active employing districts. 
Why particular trades settled in particular places 
it is often difficult to say ; but one thing is certain, 
that when a trade has settled in any one spot, it 
is very difficult for another to oust it — impossible 
unless the second place possesses some very great 
intrinsic advantage. Commerce is curiously con- 
servative in its homes, unless it is imperiously 



1 2 INTROD UCTOR Y. 

obliged to migrate. Partly from this cause, and 
partly from others, there are whole districts in 
England which cannot and do not employ their 
own money. No purely agricultural county doe? 
so. The savings of a county with good land but 
no manufactures and no trade much exceed what 
can be safely lent in the county. These savings 
are first lodged in the local banks, are by them 
sent to London, and are deposited with London 
bankers, or with the bill brokers. In either case 
the result is the same. The money thus sent 
up from the accumulating districts is employed 
in discounting the bills of the industrial districts. 
Deposits are made with the bankers and bill 
brokers in Lombard Street by the bankers of such 
counties as Somersetshire and Hampshire, and 
those bill brokers and bankers employ them 
in the discount of bills from Yorkshire and 
Lancashire. Lombard Street is thus a perpetual 
agent between the two great divisions of Eng- 
land, - — between the rapidly-growing districts, 
where almost any amount of money can be well 
and easily employed, and the stationary and the 
declining districts, where there is more money 
than can be used. 

This organisation is so useful because it is 
so easily adjusted. Political economists say that 



INTRODUCTORY. 



Ii 



capital sets towards the most profitable trades, 
and that it rapidly leaves the less profitable 
and non-paying trades. But in ordinary countries 
this is a slow process, and some persons who 
want to have ocular demonstration of abstract 
truths have been inclined to doubt it because they 
could not see it. In England, however, the 
process would be visible enough if you could only 
see the books of the bill brokers and the bankers. 
Their bill cases as a rule are full of the bills 
drawn in the most profitable trades, and cczteris 
paribus and in comparison empty of those drawn 
in the less profitable. If the iron trade ceases to 
be as profitable as usual, less iron is sold ; the 
fewer the sales the fewer the bills ; and in 
consequence the number of iron bills in Lombard 
street is diminished. On the other hand, if in 
consequence of a bad harvest the corn trade 
becomes on a sudden profitable, immediately 
' corn bills ' are created in great numbers, and if 
good are discounted in Lombard Street. Thus 
English capital runs as surely and instantly where 
it is most wanted, and where there is most to be 
made of it, as water runs to find its level. 

This efficient and instantly-ready organisation 
gives us an enormous advantage in competition 
with less advanced countries — less advanced, that 



14 INTR OD UC TOR Y. 

is, in this particular respect of credit. In a new- 
trade English capital is instantly at the disposal of 
persons capable of understanding the new oppor- 
tunities and of making good use of them. In 
countries where there is little money to lend, and 
where that little is lent tardily and reluctantly, 
enterprising traders are long kept back, because 
they cannot at once borrow the capital, without 
which skill and knowledge are useless. All sudden 
trades come to England, and in so doing often 
disappoint both rational probability and the pre- 
dictions of philosophers. The Suez Canal is a 
curious case of this. All predicted that the canal 
would undo what the discovery of the passage to 
India round the Cape effected. Before that all 
Oriental trade went to ports in the South of 
Europe, and was thence diffused through Europe. 
That London and Liverpool should be centres of 
East Indian commerce is a geographical anomaly, 
which the Suez Canal, it was said, would rectify. 
'The Greeks/ said M. de Tocqueville, 'the 
Styrians, the Italians, the Dalmatians, and the 
Sicilians, are the people who will use the Canal if 
any use it.' But, on the contrary, the main use of 
the Canal has been by the English. None of the 
nations named by Tocqueville had the capital, or 
a tithe of it, ready to build the large screw 



INTROD UCTOR Y. 



iS 



steamers which alone can use the Canal profitably. 
Ultimately these plausible predictions may or may 
not be right, but as yet they have been quite 
wrong, not because England has rich people — 
there are wealthy people in all countries — but be- 
cause she possesses an unequalled fund of floating 
money, which will help in a moment any merchant 
who sees a great prospect of new profit. 

And not only does this unconscious ' organisa- 
tion of capital,' to use a continental phrase, make 
the English specially quick in comparison with 
their neighbours on the continent at seizing on 
novel mercantile opportunities, but it makes them 
likely also to retain any trade on which they have 
once regularly fastened. Mr. Macculloch, following 
Ricardo, used to teach that all old nations had a 
special aptitude for trades in which much capital 
is required. The interest of capital having been 
reduced in such countries, he argued, by the 
necessity of continually resorting to inferior soils, 
they can undersell countries where profit is high 
in all trades needing great capital. And in this 
theory there is doubtless much truth, though it 
can only be applied in practice after a number of 
limitations and with a number of deductions of 
which the older school of political economists did 
not take enough notice. But the same principle 



1$ INTRODUCTORY. 

plainly and practically applies to England, in con- 
sequence of her habitual use of borrowed capital. 
As has been explained, a new man, with a small 
capital of his own and a large borrowed capital, 
can undersell a rich man who depends on his own 
capital only. The rich man wants the full rate of 
mercantile profit on the whole of the. capital em- 
ployed in his trade, but the poor man wants only 
the interest of money (perhaps not a third of the 
rate of profit) on very much of what he uses, and 
therefore an income will be an ample recompense 
to the poor man which would starve the rich man 
out of the trade. All the common notions about 
the new competition of foreign countries with 
England and its dangers — notions in which there 
is in other aspects much truth — require to be 
reconsidered in relation to this aspect. England 
has a special machinery for getting into trade new 
men who will be content with low prices, and 
this machinery will probably secure her success, 
for no other country is soon likely to rival it ef- 
fectually. 

There are many other points which might be 
insisted on, but it would be tedious and useless to 
elaborate the picture. The main conclusion is very 
plain — that English trade is become essentially 
a trade on borrowed capital, and that it is only by 



INTRODUCTORY. 



17 



this refinement of our banking system that we are 
able to do the sort of trade we do, or to get 
through the quantity of it. 

But in exact proportion to the power of this 
system is its delicacy — I should hardly say too 
much if I said its danger. Only our familiarity 
blinds us to the marvellous nature of the system. 
There never was so much borrowed money col- 
lected in the world as is now collected in London. 
Of the many millions in Lombard street, infinitely 
the greater proportion is held by bankers or 
others on short notice or on demand ; that is 
to say, the owners could ask for it all any day 
they please : in a panic some of them do ask 
for some of it. If any large fraction of that 
money really was demanded, our banking system 
and our industrial system too would be in great 
danger. 

Some of those deposits too are of a peculiar and 
very distinct nature. Since the Franco-German 
war, we have become to a much larger extent than 
before the Bankers of Europe. A very large sum 
of foreign money is on various accounts and for 
various purposes held here. And in a time of 
panic it might be asked for. In 1866 we held 
only a much smaller sum of foreign money, but 
that smaller sum was demanded and we had to pay 



! g INTR OD UC TOR Y. 

it at great cost and suffering, and it would be 
far worse if we had to pay the greater sums we 
now hold, without better resources than we had 
then. 

It may be replied, that though our instant 
liabilities are great, our present means are large ; 
that though we have much we may be asked to 
pay at any moment, we have very much always 
ready to pay it with. But, on the contrary, there 
is no country at present, and there never was any 
country before, in which the ratio of the cash re- 
serve to the bank deposits was so small as it is 
now in England.* So far from our being able to 
rely on the proportional magnitude of our cash in 
hand, the amount of that cash is so exceedingly 
small that a bystander almost trembles when he 
compares its minuteness with the immensity of 
the credit which rests upon it. 

Again, it may be said that we need not be 
alarmed at the magnitude of our credit system or 
at its refinement, for that we have learned by ex- 
perience the way of controlling it, and always 
manage it with discretion. But we do not 
always manage it with discretion. There is the 
astounding instance of Overend, Gurney, and Co, 
to the contrary. Ten years ago that house stood 

* See Note A at the end of the volume. 



INTRODUCTORY. 



19 



next to the Bank of England in the City of 
London ; it was better known abroad than any 
similar firm — known, perhaps, better than any 
purely English firm. The partners had great 
estates, which had mostly been made in the 
business. They still derived an immense income 
from it. Yet in six years they lost all their 
own wealth, sold the business to the com- 
pany, and then lost a large part of the com- 
pany's capital. And these losses were made in 
a manner so reckless and so foolish, that one 
would think a child who had lent money in the 
City of London would have lent it better. After 
this example, we must not confide too surely in 
long-established credit, or in firmly-rooted tradi- 
tions of business. We must examine the system 
on which these great masses of money are 
manipulated, and assure ourselves that it is safe 
and right. 

But it is not easy to rouse men of business to 
the task. They let the tide of business float 
before them ; they make money or strive to do so 
while it passes, and they are unwilling to think 
where it is going. Even the great collapse of 
Overends, though it caused a panic, is beginning 
to be forgotten. Most men of business think — ■ 
i Anyhow this system will probably last my time. 



20 INTRO D UCTOR Y. 

It has gone on a long time, and is likely to go on 
still/ But the exact point is, that it has not gone 
on a long time. The collection of these immense 
sums in one place and in few hands is perfectly 
new. In 1 844 the liabilities of the four great London 
Joint Stock Banks were 10,637,000/. ; they now 
are more than 60,000,000/. The private deposits 
of the Bank of England then were 9,000,000/. ; 
they now are 18,000,000/. There was in 1844 
throughout the country but a fraction of the vast 
deposit business which now exists. We cannot 
appeal, therefore, to experience to prove the safety 
of our system as it now is, for the present magni- 
tude of that system is entirely new. Obviously a 
system may be fit to regulate a few millions, and 
yet quite inadequate when it is set to cope with 
many millions. And thus it may be with ( Lom- 
bard Street/ so rapid has been its growth, and so 
unprecedented is its nature. 

I am by no means an alarmist. I believe that 
our system, though curious and peculiar, may be 
worked safely ; but if we wish so to work it, we 
must study it. We must not think we have an 
easy task when we have a difficult task, or that 
we are living in a natural state when we are 
really living in an artificial one. Money will not 
manage itself, and Lombard street has a great 
deal of money to manage. 



21 



CHAPTER II. 

A GENERAL VIEW OF LOMBARD STREET. 
I. 

The objects which you see in Lombard Street, 
and in that money world which is grouped about 
it, are the Bank of England, the Private Banks, 
the Joint Stock Banks, and the bill brokers. 
But before describing each of these separately we 
must look at what all have in common, and at the 
relation of each to the others. 

The distinctive function of the banker, says 
Ricardo, ' begins as soon as he uses the money of 
others ; ' as long as he uses his own money he is 
only a capitalist. Accordingly all the banks in 
Lombard Street (and bill brokers are for this 
purpose only a kind of bankers) hold much money 
belonging to other people on running account and 
on deposit. In continental language, Lombard 
Street is an organization of credit, and we are to 
see if it is a good or bad organization in its kind 



22 A GENERAL VIEW OF LOMBARD STREET. 

or if, as is most likely, it turn out to be mixed, 
what are its merits and what are its defects ? 

The main point on which one system of credit 
differs from another is ' soundness/ Credit means 
that a certain confidence is given, and a certain 
trust reposed. Is that trust justified ? and is that 
confidence wise ? These are the cardinal questions. 
To put it more simply — credit is a set of promises 
to pay ; will those promises be kept ? Especially 
in banking, where the 'liabilities/ or promises to 
pay, are so large, and the time at which to pay 
them, if exacted, is so short, an instant capacity to 
meet engagements is the cardinal excellence. 

All which a banker wants to pay his creditors 
is a sufficient supply of the legal tender of the 
country, no matter what that legal tender may be. 
Different countries differ in their laws of legal 
tender, but for the primary purposes of banking 
these systems are not material. A good system 
of currency will benefit the country, and a bad 
system will hurt it. Indirectly, bankers will be 
benefited or injured with the country in which 
they live ; but practically, and for the purposes of 
their daily life, they have no need to think, and 
never do think, on theories of currency. They 
look at the matter simply. They say — ' I am 
under an obligation to pay such and such* sums of 



A GENERAL VIEW OF LOMBARD STREET. 



23 



legal currency ; how much have I in my till, or 
have I at once under my command, of that 
currency?' In America, for example, it is quite 
enough for a banker to hold ' greenbacks/ though 
the value of these changes as the Government 
chooses to enlarge or contract the issue. But a 
practical New York banker has no need to think 
of the goodness or badness of this system at all ; 
he need only keep enough ' greenbacks ' to pay all 
probable demands, and then he is fairly safe from 
the risk of failure. 

By the law of England the legal tenders are 
gold and silver coin (the last for small amounts 
only), and Bank of England notes. But the 
number of our attainable bank notes is not, like 
American 'greenbacks,' dependent on the will of 
the State ; it is limited by the provisions of the 
Act of 1844. That Act separates the Bank of 
England into two halves. The Issue Department 
only issues notes, and can only issue 15,000,000/. 
on Government securities ; for all the rest it must 
have bullion deposited. Take, for example an 
account, which may be considered an average 
specimen of those of the last few years — that for 
the last week of 1869 : — 



A GENERAL VIEW OF LOMBARD STREET. 



An account pursuant to the Act *jth and Sth Victoria, cap, 32, 
for the week ending on Wednesday ', the 29th day of December ^ 
1869. 

Issue Department. 



Notes issued 



£ 




£ 


33,288,640 


Government debt . 


11,015,100 




Other securities 


3,984,900 




Gold coin and bul- 






lion 


18,288,640 




Silver bullion 


— 


33,288,640 


33,288,640 



Banking Department. 



Proprietors' capital 14,553,000 

Rest . . . 3,103,301 

Public deposits,. in- 
cluding Excheq- 
uer, Savings' 
Banks, Commis- 
sioners of Na- 
tional Debt, and 
dividend ac- 
counts . . 8,585,215 

Other deposits . 18,204,607 

Seven-day and other 
bills . . 445,490 



Government se- 
curities 
Other securities 
Notes 



I3 ? 8n ? 953 
19,781,988 
10,389,690 
Gold and silver coin 907,982 



44,891,613 I 44,891,613 

GEO. FORBES, Chief Cashier. 
Dated the 30th December, 1869. 



A GENERAL VIEW OF LOMBARD STREET. 2 $ 

There are here 15,000,000/. bank notes issued on 
securities, and 18,288,640/. represented by bullion. 
The Bank of England has no power by law 
to increase the currency in any other manner. It 
holds the stipulated amount of securities, and for 
all the rest it must have bullion. This is the 
1 cast iron ' system — the ' hard and fast ' line which 
the opponents of the Act say ruins us, and which 
the partizans of the Act say saves us. But I 
have nothing to do with its expediency here. All 
which is to my purpose is that our paper ' legal 
tender/ our bank notes, can only be obtained in 
this manner. If, therefore, an English banker 
retains a sum of Bank of England notes or coin 
in due proportion to his liabilities, he has a suffi- 
cient amount of the legal tender of this country, 
and he need not think of anything more. 

But here a distinction must be made. It is to be 
observed that properly speaking we should not in- 
clude in the ' reserve ' of a bank ' legal tenders,' or 
cash, which the Bank keeps to transact its daily 
business. That is as much a part of its daily 
stock-in-trade as its desks or offices ; or at any rate, 
whatever words we may choose to use, we must 
carefully distinguish between this cash in the till 
which is wanted every day, and the safety-fund, as 
we may call it, the special reserve held by the 



2 6 A GENERAL VIEW OF LOMBARD STREET. 

bank to meet extraordinary and unfrequent de- 
mands. 

What then, subject to this preliminary ex- 
planation, is the amount of legal tender held by our 
bankers against their liabilities ? The answer is 
remarkable, and is the key to our whole system. 
It may be broadly said that no bank in London or 
out of it holds any considerable sum in hard cash 
or legal tender (above what is wanted for its daily 
business) except the Banking Department of the 
Bank of England. That department had on the 
29th day of December, 1869, liabilities as fol- 
lows \r 

£ 

Public deposits 8,585,000 

Private deposits 18,205,000 

Seven-day and other bills . . . 445,000 



Total .... 27,235,000 

and a cash reserve of 1 1,297,000/. And this is all 
the cash reserve, we must carefully remember, 
which, under the law, the Banking Department of 
the Bank of England — as we cumbrously call it — 
the Bank of England for banking purposes — 
possesses. That department can no more multiply 
or manufacture bank notes than any other bank 
can multiply them. At that particular day the 
Bank of England had only 11,297,000/. in its till 



A GENERAL VIEW OF LOMBARD STREET. 27 

against liabilities of nearly three times the amount. 
It had % Consols ' and other securities which it 
could offer for sale no doubt, and which, if sold, 
would augment its supply of bank notes — and the 
relation of such securities to real cash will be dis- 
cussed presently ; but of real cash, the Bank of 
England for this purpose — the banking bank — had 
then so much and no more. 

And we may well think this a great deal, if we 
examine the position of other banks. No other 
bank holds any amount of substantial importance 
in its own till beyond what is wanted for daily pur- 
poses. All London banks keep their principal 
reserve on deposit at the Banking Department of 
the Bank of England. This is by far the easiest 
and safest place for them to use. The Bank of 
England thus has the responsibility of taking care 
of it. The same reasons which make it desirable 
for a private person to keep a banker make it also 
desirable for every banker, as respects his reserve, 
to bank with another banker if he safely can. The 
custody of very large sums in solid cash entails 
much care, and some cost ; everyone wishes to shift 
these upon others if he can do so without suffering. 
Accordingly, the other bankers of London, having 
perfect confidence in the Bank of England, get 
that bank to keep their reserve for them. 



2 3 A GENERAL VIEW OF LOMBARD STREET. 

The London bill brokers do much the same. 
Indeed, they are only a special sort of bankers who 
allow daily interest on deposits, and who for most 
of their money give security. But we have no 
concern now with these differences of detail. The 
bill brokers lend most of their money, and deposit 
the remnant either with the Bank of England or 
some London banker. That London banker lends 
what he chooses of it, the rest he leaves at the 
Bank of England. You always come back to the 
Bank of England at last. 

But those who keep immense sums with a banker 
gain a convenience at the expense of a danger. 
They are liable to lose them if the bank fail. As 
all other bankers keep their banking reserve at the 
Bank of England, they are liable to fail if it fails. 
They are dependent on the management of the 
Bank of England in a day of difficulty and at a 
crisis for the spare money they keep to meet that 
difficulty and crisis. And in this there is certainly 
considerable risk. Three times ' Peel's Act ' has 
been suspended because the Banking Department 
was empty. Before the Act was broken — 

£ 

In 1847, the Banking Department was reduced to 1,994,000 
* 8 57 „ „ 1,462,000 

1866 „ 99 3,000,000 

In fact, in none of those years could the Banking 



A GENERAL VIEW OF LOMBARD STREET. 



29 



Department of the Bank of England have sur- 
vived if the law had not been broken. 

Nor must it be fancied that this danger is 
unreal, artificial, and created by law. There is 
a risk of our thinking so, because we hear that 
the danger can be cured by breaking an Act ; 
but substantially the same danger existed before 
the Act. In 1825, when only coin was a legal 
tender, and when there was only one department 
in the Bank, the Bank had reduced its reserve to 
1,027,000/., and was within an ace of stopping 
payment. 

But the danger to the depositing banks is not 
the sole or the principal consequence of this mode 
of keeping the London reserve. The main effect 
is to cause the reserve to be much smaller in 
proportion to the liabilities than it would other- 
wise be. The reserve of the London bankers 
being on deposit in the Bank of England, the Bank 
always lends a principal part of it. Suppose, a 
favourable supposition, that the Banking De- 
partment holds more than two-fifths of its lia- 
bilities in cash — that it lends three-fifths of its 
deposits and retains in reserve only two-fifths. 
If then the aggregate of the bankers' deposited 
reserve be 5,000,000/., 3,000,000/. of it will 
be lent by the Banking Department, and 



30 A GENERAL VIEW OF LOMBARD STREET. 

2,000,000/. will be kept in the till. In conse- 
quence, that 2,000,000/. is all which is really held 
in actual cash as against the liabilities of the 
depositing banks. If Lombard Street were on a 
sudden thrown into liquidation, and made to pay 
as much as it could on the spot, that 2,000,000/. 
would be all which the Bank of England could 
pay to the depositing banks, and consequently all, 
besides the small cash in the till, which those 
banks could on a sudden pay to the persons who 
have deposited with them. 

We see then that the banking reserve of the 
Bank of England — some 10,000,000/. on an aver- 
age of years now, and formerly much less — is all 
which is held against the liabilities of Lombard 
Street ; and if that were all, we might well be 
amazed at the immense development of our credit 
system — in plain English, at the immense amount 
of our debts payable on demand, and the small- 
ness of the sum of actual money which we keep 
to pay them if demanded. But there is more to 
come. Lombard Street is not only a place requir- 
ing to keep a reserve, it is itself a place where re- 
serves are kept. All country bankers keep their re- 
serve in London. They only retain in each country 
town the minimum of cash necessary to the trans- 
action of the current business of that country town. 



A GENERAL VIEW OF LOMBARD STREET, 



31 



Long experience has told them to a nicety how 
much this is, and they do not waste capital and 
lose profit by keeping more idle. They send the 
money to London, invest a part of it in securities, 
and keep the rest with the London bankers and 
the bill brokers. The habit of Scotch and Irish 
bankers is much the same. All their spare money 
is in London, and is invested as all other London 
money now is ; and, therefore, the reserve in 
the Banking Department of the Bank of England 
is the banking reserve not only of the Bank of 
England, but of all London — and not only of 
all London, but of all England, Ireland, and 
Scotland too. 

Of late there has been a still further increase 
in our liabilities. Since the Franco-German war, 
we may be said to keep the European reserve 
also. Deposit Banking is indeed so small on 
the Continent, that no large reserve need be 
held on account of it. A reserve of the same 
sort which is needed in England and Scotland 
is not needed abroad. But all great commu- 
nities have at times to pay large sums in cash, 
and of that cash a great store must be kept 
somewhere. Formerly there were two such stores 
in Europe, one was the Bank of France, and the 
other the Bank of England. But since the 



32 



A GENERAL VIEW OF LOMBARD STREET. 



suspension of specie payments by the Bank of 
France, its use as a reservoir of specie is at an 
end. No one can draw a cheque on it and be 
sure of getting gold or silver for that cheque. 
Accordingly the whole liability for such inter- 
national payments in cash is thrown on the 
Bank of England. No doubt foreigners cannot 
take from us our own money ; they must send 
here ' value ' in some shape or other for all they 
take away. But they need not send ' cash ; ' they 
may send good bills and discount them in 
Lombard Street and take away any part of the 
produce, or all the produce, in bullion. It is only 
putting the same point in other words to say that 
all exchange operations are centering more and 
more in London. Formerly for many purposes 
Paris was a European settling-house, but now it 
has ceased to be so. The note of the Bank of 
France has not indeed been depreciated enough 
to disorder ordinary transactions. But any de- 
preciation, however small — even the liability to 
depreciation without its reality- — is enough to 
disorder exchange transactions. They are cal- 
culated to such an extremity of fineness that the 
change of a decimal may be fatal, and may turn 
a profit into a loss. Accordingly London has 
become the sole great settling-house of exchange 



A GENERAL VIEW OF LOMBARD STREET. 



33 



transactions in Europe, instead of being formerl) 
one of two. And this pre-eminence London will 
probably maintain, for it is a natural pre-emi- 
nence. The number of mercantile bills drawn upon 
London incalculably surpasses those drawn on any 
other European city ; London is the place which 
receives more than any other place, and pays 
more than any other place, and therefore it is the 
natural ' clearing house/ The pre-eminence of 
Paris partly arose from a distribution of political 
power, which is already disturbed ; but that of 
London depends on the regular course of com- 
merce, which is singularly stable and hard to change. 
Now that London is the clearing-house to 
foreign countries, London has a new liability to 
foreign countries. At whatever place many peo- 
ple have to make payments, at that place those 
people must keep money. A large deposit of 
foreign money in London is now necessary for the 
business of the world. During the immense pay- 
ments from France to Germany, the sum in transitu 
— the sum in London — has perhaps been unusually 
large. But it will ordinarily be very great. The 
present political circumstances no doubt will soon 
change. We shall soon hold in Lombard Street far 
less of the money of foreign governments ; but we 
shall hold more and more of the money of private 



34 



A GENERAL VIEW OF LOMBARD STREET. 



persons ; for the deposit at a clearing-house nec- 
essary to settle the balance of commerce must tend 
to increase as that commerce itself increases. 

And this foreign deposit is evidently of a deli- 
cate and peculiar nature. It depends on the good 
opinion of foreigners, and that opinion may di- 
minish or may change into a bad opinion. After 
the panic of 1866, especially after the suspension 
of Peel's Act (which many foreigners confound 
with a suspension of cash payments), a large 
amount of foreign money was withdrawn from 
London. And we may reasonably presume that 
in proportion as we augment the deposits of cash 
by foreigners in London, we augment both the 
chances and the disasters of a ' run 9 upon Eng- 
land. 

And if that run should happen, the bullion to 
meet it must be taken from the Bank. There is 
no other large store in the country. The great 
exchange dealers may have a little for their own 
purposes, but they have no* store worth mention- 
ing in comparison with this. If a foreign creditor 
is so kind as to wait his time and buy the bullion 
as it comes into the country, he may be paid 
without troubling the Bank or distressing the 
money market. The German Government has 
recently been so kind ; it was in no respect 



A GENERAL VIEW OF LOMBARD STREET. 35 

afraid. But a creditor who takes fright will not 
wait, and if he wants bullion in a hurry he must 
come to the Bank of England. 

In consequence all our credit system depends 
on the Bank of England for its security. On the 
wisdom of the directors of that one Joint Stock 
Company, it depends whether England shall be 
solvent or insolvent. This may seem too strong, 
but it is not. All banks depend on the Bank of 
England, and all merchants depend on some 
banker. If a merchant have 10,000/. at his 
bankers, and wants to pay it to some one in 
Germany, he will not be able to pay it unless his 
banker can pay him, and the banker will not be 
able to pay if the Bank of England should be in 
difficulties and cannot produce his ' reserve/ 

The directors of the Bank are, therefore, in fact, 
if not in name, trustees for the public, to keep 
a banking reserve on their behalf; and it would 
naturally be expected either that they distinctly 
recognized this duty and engaged to perform it, 
or that their own self-interest was so strong in the 
matter that no engagement was needed. But so 
far from there being a distinct undertaking on the 
part of the Bank directors to perform this duty, 
many of them would scarcely acknowledge it, and 
some altogether deny it. Mr. Hankey, one of the 



36 



A GENERAL VIEW OF LOMBARD STREET. 



most careful and most experienced of them, says 
in his book on the Bank of England, the best 
account of the practice and working of the Bank 
which anywhere exists — ' I do not intend here tc 
enter at any length on the subject of the general 
management of the Bank, meaning the Banking 
Department, as the principle upon which the 
business is conducted does not differ, as far as I 
am aware, from that of any well-conducted bank 
in London/ But, as anyone can see by the 
published figures, the Banking Department of the 
Bank of England keeps as a great reserve in 
bank notes and coin between 30 and 50 per cent, 
of its liabilities, and the other banks only keep in 
bank notes and coin the bare minimum they need 
to open shop with. And such a constant differ- 
ence indicates, I conceive, that the two are not 
managed on the same principle. 

The practice of the Bank has, as we all know, 
been much and greatly improved. They do not 
now manage like the other Banks in Lombard 
Street. They keep an altogether different kind 
and quantity of reserve ; but though the practice* 
is mended the theory is not. There has never 
been a distinct resolution passed by the Directors 
of the Bank of England, and communicated by 
them to the public, stating even in the most 



A GENERAL VIEW OF LOMBARD STREET. 



37 



general manner, how much reserve they mean to 
keep or how much they do not mean, or by what 
principle in this important matter they will be 
guided. 

The position of the Bank directors is indeed 
most singular. On the one side a great city 
opinion — a great national opinion, I may say, for 
the nation has learnt much from many panics — 
requires the directors to keep a large reserve. 
The newspapers, on behalf of the nation, are 
always warning the directors to keep it, and 
watching that they do keep it ; but, on the other 
hand, another less visible but equally constant 
pressure pushes the directors in exactly the reverse 
way, and inclines them to diminish the reserve. 

This is the natural desire of all directors to 
make a good dividend for their shareholders. 
The more money lying idle the less, cceteris 
paribus, is the dividend ; the less money lying 
idle the greater is the dividend. And at almost 
every meeting of the proprietors of the Bank of 
England, there is a conversation on this subject. 
Some proprietor says that he does not see why so 
much money is kept idle, and hints that the divi- 
dend ouo^ht to be more. 

Indeed, it cannot be wondered at that the 
Bank proprietors do not quite like their position. 



38 A GENERAL VIEW OF LOMBARD STREET. 

Theirs is the oldest bank in the City, but their 
profits do not increase, while those of other banks 
most rapidly increase. In 1844, the dividend on 
the stock of the Bank of England was 7 per cent., 
and the price of the stock itself 212 ; the dividend 
now is 9 per cent., and the price of the stock 232. 
But in the same time the shares of the London 
and Westminster Bank, in spite of an addition of 
100 per cent, to the capital, have risen from 27 to 
66, and the dividend from 6 per cent, to 20 per 
cent. That the Bank proprietors should not like 
to see other companies getting richer than their 
company is only natural. 

Some part of the lowness of the Bank dividend, 
and of the consequent small value of Bank stock, 
is undoubtedly caused by the magnitude of the 
Bank capital ; but much of it is also due to 
the great amount of unproductive cash — of cash 
which yields no interest — that the Banking 
Department of the Bank of England keeps lying 
idle. If we compare the London and Westminster 
Bank — which is the first of the joint-stock banks 
in the public estimation and known to be very cau- 
tiously and carefully managed — with the Bank of 
England, we shall see the difference at once. The 
London and Westminster has only 13 per cent, of 
its liabilities lying idle. The Banking Department 



A GENERAL VIEW OF LOMBARD STREET. 



39 



of the Bank of England has over 40 per cent. So 
great a difference in the management must cause, 
and does cause, a great difference in the profits. 
Inevitably the shareholders of the Bank of 
England will dislike this great difference ; more 
or less, they will always urge their directors to 
diminish (as far as possible) the unproductive 
reserve, and to augment as far as possible their 
own dividend. 

In most banks there would be a wholesome dread 
restraining the desire of the shareholders to reduce 
the reserve ; they would fear to impair the credit 
of the bank. But fortunately or unfortunately, no 
one has any fear about the Bank of England. 
The English world at least believes that it will not, 
almost that it cannot, fail. Three times since 1844 
the Banking Department has received assistance, 
and would have failed without it. In 1825, the 
entire concern almost suspended payment; in 1797, 
it actually did so. But still there is a faith in the 
Bank, contrary to experience, and despising 
evidence. No doubt in every one of these years 
the condition of the Bank, divided or undivided, 
was in a certain sense most sound ; it could 
zdtimately have paid all' its creditors aft it owed, 
and returned to its shareholders all their own 
capital. But ultimate payment is not what the 



40 A GENERAL VIEW OF LOMBARD STREET. 

creditors of a bank want ; they want present, not 
postponed, payment ; they want to be repaid 
according to agreement ; the contract was that they 
should be paid on demand, and if they are not 
paid on demand they may be ruined. And that 
instant payment, in the years I speak of, the 
Bank of England certainly could not have made. 
But no one in London ever dreams of question- 
ing the credit of the Bank, and the Bank never 
dreams that its own credit is in danger. Somehow 
everybody feels the Bank is sure to come right. 
In 1797, when it had scarcely any money left, 
the Government said not only that it need not pay 
away what remained, but that it must not. The 
6 effect of letters of licence ' to break Peel's Act 
has confirmed the popular conviction that the 
Government is close behind the Bank, and will 
help it when wanted. Neither the Bank nor the 
Banking Department have ever had an idea of 
being put ' into liquidation ; ' most men would 
think as soon of ' winding up ' the English nation. 
Since then the Bank of England, as a bank, is 
exempted from the perpetual apprehension that 
makes other bankers keep a large reserve — the 
apprehension of discredit — it would seem particu- 
larly necessary that its managers should be 
themselves specially interested in keeping that 



A GENERAL VIEW OF LOMBARD STREET. 41 

reserve, and specially competent to keep it. But I 
need not say that the Bank directors have not their 
personal fortune at stake in the management of 
the Bank. They are rich City merchants, and 
their stake in the Bank is trifling in comparison 
with the rest of their wealth. If the Bank.zew^ 
wound up, most of them would hardly in their 
income feel the difference. And what is more, the 
B&nk directors are not trained bankers ; they were 
not bred to the trade, and do not in general give 
the main power of their minds ■ to it. They are 
merchants, most of whose time and most of whose 
real mind are occupied in making money in their 
own business and for themselves. 

It might be expected that as this great public 
duty was cast upon the Banking Department of the 
Bank, the principal statesmen (if not Parliament 
itself) would have enjoined on them to perform it. 
But no distinct resolution of Parliament has ever 
enjoined it ; scarcely any stray word of any influ- 
ential statesman. And, on the contrary, there is 
a whole catena of authorities, beginning with Sir 
Robert Peel and ending with Mr. Lowe, which 
say that the Banking Department of the Bank of 
England is only a Bank like any other bank — a 
Company like other companies ; that in this 
capacity it has no peculiar position, and no public 



42 



A GENERAL VIEW OF LOMBARD STREET. 



duties at all. Nine-tenths of English statesmen, 
if they were asked as to the management of the 
Banking Department of the Bank of England, 
would reply that it was no business of theirs or of 
Parliament at all; that the Banking Department 
alone must look to it. 

The result is that we have placed the exclusive 
custody of our entire banking reserve in the 
hands of a single board of directors not particu- 
larly trained for the duty — who might be called 
* amateurs/ — who have no particular interest above 
other people in keeping it undiminished — who 
acknowledge no obligation to keep it undi- 
minished — who have never been told by any great 
statesman or public authority that they are so 
to keep it or that they have anything to do with it — 
who are named by and are agents for a proprietary 
which would have a greater income if it was 
diminished, — who do not fear, and who need not 
fear, ruin, even if it were all gone and wasted. 

That such an arrangement is strange must be 
plain ; but its strangeness can only be compre- 
hended when we know what the custody of a 
national banking reserve means, and how delicate 
and difficult it is. 



A GENERAL VIEW OF LOMBARD STREET. 



43 



II. 



Such a reserve as we have seen is kept to meet 
sudden and unexpected demands. If the bankers 
of a country are asked for much more than is 
commonly wanted, then this reserve must be 
resorted to. What then are these extra de- 
mands ? and how is this extra reserve to be 
used ? Speaking broadly, these extra demands 
are of two kinds — one from abroad to meet for- 
eign payments requisite to pay large and unusual 
foreign debts, and the other from at home to meet 
sudden apprehension or panic arising in any 
manner, rational or irrational. 

No country has ever been so exposed as 
England to a foreign demand on its banking 
reserve, not only because at present England is a 
large borrower from foreign nations, but also (and 
much more) because no nation has ever had a 
foreign trade of such magnitude, in such varied 
objects, or so ramified through the world. The 
ordinary foreign trade of a country requires no 
cash ; the exports on one side balance the imports 
on the other. But a sudden trade of import — ■ 
like the import of foreign corn after a bad harvest 



44 



A GENERAL VIE W OF LOMBARD STREET. 



— or (what is much less common, though there 
are cases of it) the cessation of any great export, 
— causes a balance to become due, which must 
be paid in cash. 

Now, the only source from which large sums of 
cash can be withdrawn in countries where bank- 
ing is at all developed, is a ' bank reserve/ In 
England especially, except a few sums of no very 
considerable amount held by bullion dealers in the 
course of their business, there are no sums worth 
mentioning in cash out of the banks ; an ordinary 
person could hardly pay a serious sum without 
going to some bank, even if he spent a month in 
trying. All persons who wish to pay a large sum 
in cash trench of necessity on the banking 
reserve. But then what is * cash ? ' Within a 
country the action of a Government can settle the 
quantity, and therefore the value, of its currency ; 
but outside its own country, no Government can 
do so. Bullion is the ' cash ' of international 
trade ; paper currencies are of no use there, and 
coins pass only as they contain more or less 
bullion. 

When then the legal tender of a country is 
purely metallic, all that is necessary is that banks 
should keep a sufficient store of that ' legal tender/ 
But when the ' legal tender ' is partly metal and 



A GENERAL VIEW OF LOMBARD STREET. 45 

partly paper, it is necessary that the paper ' legal 
tender ' — the bank note — should be convertible 
into bullion. And here I should pass my limits, 
and enter on the theory of Peel's Act if I began to 
discuss the conditions of convertibility. I deal 
only with the primary pre-requisite of effectual 
foreign payments — a sufficient supply of the local 
legal tender ; with the afterstep— the change of 
the local legal tender into the universally accepta- 
ble commodity — I cannot deal. 

What I have to deal with is, for the present, 
ample enough. The Bank of England must keep 
a reserve of ' legal tender' to be used for foreign 
payments if itself fit, and to be used in obtaining 
bullion if itself unfit. And foreign payments are 
sometimes very large, and often very sudden. 
The ' cotton drain/ as it is called — the drain to the 
East to pay for Indian cotton during the American 
Civil War— took many millions from this country 
for a series of years. A bad harvest must take 
millions in a single year. In order to find such 
great sums, the Bank of England requires the 
steady use of an effectual instrument. 

That instrument is the elevation of the rate of 
interest. If the interest of money be raised, it is 
proved by experience that money does come to 
Lombard Street, and theory shows that it ozight to 



46 A GENERAL VIEW OF LOMBARD STREET. 

come. To fully explain the matter I must go deep 
into the theory of the exchanges, but the general 
notion is plain enough. Loanable capital, like 
every other commodity, comes where there is most 
to be made of it. Continental bankers and others 
instantly send great sums here, as soon as the 
rate of interest shows that it can be done profita- 
bly. While English credit is good, a rise of the 
value of money in Lombard Street immediately by 
a banking operation brings money to Lombard 
Street. And there is also a slower mercantile 
operation. The rise in the rate of discount acts 
immediately on the trade of this country. Prices 
fall here ; in consequence imports are diminished, 
exports are increased, and, therefore, there is 
more likelihood of a balance in bullion coming to 
this country after the rise in the rate than there 
was before. 

Whatever persons — one bank or many banks — 
in any country hold the banking reserve of that 
country, ought at the very beginning of an unfa- 
vourable foreign exchange at once to raise the rate 
of interest, so as to prevent their reserve from 
being diminished farther, and so as to replenish it 
by imports of bullion. 

This duty, up to about the year i860, the Bank 
of England did not perform at all, as I shall show 



A GENERAL VIEW OF LOMBARD STREET. 



47 



farther on. A more miserable history can hardly 
be found than that of the attempts of the Bank — 
if indeed they can be called attempts — to keep a 
reserve and to manage a foreign drain between the 
year 1819 (when cash payments were resumed by 
the Bank, and when our modern Money Market 
may be said to begin) and the year 1857. The 
panic of that year for the first time taught the Bank 
directors wisdom, and converted them to sound 
principles. The present policy of the Bank is an 
infinite improvement on the policy before 1857: 
the two must not be for an instant confounded ; 
but nevertheless, as I shall hereafter show, the 
present policy is now still most defective, and 
much discussion and much effort will be wanted 
before that policy becomes what it ought to be. 

A domestic drain is very different. Such a 
drain arises from a disturbance of credit within 
the country, and the difficulty of dealing with it 
is the greater, because it is often caused, or at 
least often enhanced, by a foreign drain. Times 
without number the public have been alarmed 
mainly because they saw that the Banking reserve 
was already low, and that it was daily getting 
lower. The two maladies— an external drain and 
an internal — often attack the money market at 
once. What then ought to be done ? 



4S A GENERAL VIEW OF LOMBARD STREET. 

In opposition to what might be at first sight 
supposed, the best way for the bank or banks who 
have the custody of the bank reserve to deal with 
a drain arising from internal discredit, is to lend 
freely. The first instinct of everyone is the con- 
trary. There being a large demand on a fund 
which you want to preserve, the most obvious 
way to preserve it is to hoard it — to get in as much 
as you can, and to let nothing go out which you 
can help. But every banker knows that this is 
not the way to diminish discredit. This discredit 
means, * an opinion that you have not got any 
money/ and to dissipate that opinion, you must, 
if possible, show that you have money : you must 
employ it for the public benefit in order that the 
public may know that you have it. The time 
for economy and for accumulation is before. A 
good banker will have accumulated in ordinary 
times the reserve he is to make use of in extra- 
ordinary times. 

Ordinarily discredit does not at first settle on 
any particular bank, still less does it at first con- 
centrate itself on the bank or banks holding the 
principal cash reserve. These banks are almost 
sure to be those in best credit, or they would not 
be in that position, and, having the reserve, they 
are likely to look stronger and seem stronger than 



A GENERAL VIEW OF LOMBARD STREET. 



49 



any others. At first, incipient panic amounts to a 
kind of vague conversation : Is A. B. as good as 
he used to be ? Has not C. D. lost money ? and 
a thousand such questions. A hundred people 
are talked about, and a thousand think, — ' Am I 
talked about, or am I not ? ' 'Is my credit as good 
as it used to be, or is it less ? ' And every 
day, as a panic grows, this floating suspicion 
becomes both more intense and more diffused ; it 
attacks more persons, and attacks them all 
more virulently than at first. All men of experi- 
ence, therefore, try to ' strengthen themselves/ 
as it is called, in the early stage of a panic ; they 
borrow money while they can ; they come to their 
banker and offer bills for discount, which com- 
monly they would not have offered for days or 
weeks to come. And if the merchant be a reg- 
ular customer, a banker does not like to refuse, 
because if he does he will be said, or may be said, 
to be in want of money, and so may attract the 
panic to himself. Not only merchants but all 
persons under pecuniary liabilities — present or 
imminent — feel this wish to ■ strengthen them- 
selves/ and in proportion to those liabilities. 
Especially is this the case with what may be 
called the auxiliary dealers in credit. Under any 
system of banking there will always group them- 



JO A GENERAL VIEW OF LOMBARD STREET. 

selves about the main bank or banks (in which is 
kept the reserve) a crowd of smaller money 
dealers, who watch the minutiae of bills, look into 
special securities which busy bankers have not time 
for, and so gain a livelihood. As business grows, 
the number of such subsidiary persons augments. 
The various modes in which money may be lent 
have each their peculiarities, and persons who 
devote themselves to one only lend in that way 
more safely, and therefore more cheaply. In 
time of panic, these subordinate dealers in money 
will always come to the principal dealers. In 
ordinary times, the intercourse between the two is 
probably close enough. The little dealer is prob- 
ably in the habit of pledging his ' securities [ to 
the larger dealer at a rate less than he has him- 
self charged, and of running into the market to 
lend again. His time and brains are his principal 
capital, and he wants to be always using them. 
But in times of incipient panic, the minor money 
dealer always becomes alarmed. His credit is 
never very established or very wide ; he always 
fears that he may be the person on whom current 
suspicion will fasten, and often he is so. Accord- 
ingly he asks the larger dealer for advances. A 
number of such persons ask all the large dealers 
--those who have the money — the holders of the 



A GENERAL VIEW OF LOMBARD STREET. $j 

reserve. And then the plain problem before the 
great dealers comes to be — ' How shall we best 
protect ourselves ? No doubt the immediate ad- 
vance to these second-class dealers is annoying, 
but may not the refusal of it even be dangerous ? 
A panic grows by what it feeds on ; if it devours 
these second-class men, shall we, the first-class, 
be safe ? ' 

A panic, in a word, is a species of neuralgia, and 
according to the rules of science you must not 
starve it. The holders of the cash reserve must 
be ready not only to keep it for their own liabilities, 
but to advance it most freely for the liabilities of 
others. They must lend to merchants, to minor 
bankers, to ' this man and that man,' whenever 
the security is good. In wild periods of alarm, 
one failure makes many, and the best way to 
prevent the derivative failures is to arrest the 
primary failure which causes them. The way in 
which the panic of 1825 was stopped by advancing 
money has been described in so broad and graphic 
a way that the passage has become classical. ' We 
lent it/ said Mr. Harman, on behalf of the Bank 
of England, '' by every possible means and in 
modes we had never adopted before ; we took in 
stock on security, we purchased Exchequer bills, 
we made advances on Exchequer bills, -we not only 



52 



A GENERAL VIEW OF LOMBARD STREET. 



discounted outright, but we made advances on the 
deposit of bills of exchange to an immense amount 
in short, by every possible means consistent with 
the safety of the Bank, and we were not on some 
occasions over-nice. Seeing the dreadful state in 
which the public were, we rendered every assist- 
ance in our power.' After a day or two of this 
treatment, the entire panic subsided, and the 
1 City ' was quite calm. 

The problem of managing a panic must not be 
thought of as mainly a 'banking ' problem. It is 
primarily a mercantile one. All merchants are 
under liabilities ; they have bills to meet soon, and 
they can only pay those bills by discounting bills 
on other merchants. In other words, all merchants 
are dependent on borrowing money, and large mer- 
chants are dependent on borrowing much money. 
At the slightest symptom of panic many merchants 
want to borrow more than usual ; they think they 
will supply themselves with the means of meeting 
their bills while those means are still forthcoming. 
If the bankers gratify the merchants, they must 
lend largely just when they like it least ; if they 
do not gratify them, there is a panic. 

On the surface there seems a great inconsistency 
in all this. First, you establish in some bank or 
banks a certain reserve ; you make of it or them a 



A GENERAL VIEW OF LOMBARD STREET. 53 

kind of ultimate treasury, where the last shilling 
of the country is* deposited and kept. And then 
you go on to say that this final treasury is also to 
be the last lending-house ; that out of it unbounded, 
or at any rate immense, advances are to be made 
when no once else lends. This seems like saying 
— first, that the reserve should be kept, and then 
that it should not be kept. But there is no puzzle 
in the matter. The ultimate banking reserve of a 
country (by whomsoever kept) is not kept out of 
show, but for certain essential purposes, and one of 
those purposes is the meeting a demand for cash 
caused by an alarm within the country. It is not 
unreasonable that our ultimate treasure in particu- 
lar cases should be lent ; on the contrary, we keep 
that treasure for the very reason that in particular 
cases it should be lent. 

When reduced to abstract principle, the subject 
comes to this. An ' alarm ' is an opinion that 
the money of certain persons will not pay their 
creditors when those creditors want to be paid. 
If possible, that alarm is best met by enabling 
those persons to pay their creditors to the very 
moment. For this purpose only a little money 
is wanted. If that alarm is not so met, it aggra- 
vates into a panic, which is an opinion that most 
people, or very many people, will not pay their 



54 A GENERAL VIEW OF LOMBARD STREET. 

creditors ; and this too can only be met by ena- 
bling all those persons to pay what they owe, 
which takes a great deal of money, No one has 
enough money, or anything like enough, but the 
holders of the bank reserve. 

Not that the help so given by the banks holding 
that reserve necessarily diminishes it, Very com- 
monly the panic extends as far, or almost as far, 
as the bank or banks which hold the reserve, 
but does not touch- it or them at all. In this 
case it is enough if the dominant bank or banks, 
so to speak, pledge their credit for those who 
want it. Under our present system it is often 
quite enough that a merchant or a banker gets 
the advance made to him put to his credit in the 
books of the Bank of England ; he may never 
draw a cheque on it, or, if he does, that cheque 
may come in again to the credit of some other 
customer, who lets it remain on his account. An 
increase of loans at such times is often an increase 
of the liabilities of the bank, not a diminution of 
its reserve. Just so before 1 844, an issue of notes, 
as in 1825, to quell a panic entirely internal did 
not diminish the bullion reserve. The notes went 
out, but they did not return. They were issued 
as loans to the public, but the public wanted no 
more ; they never presented them for payment ; 



A GENERAL VIEW OF LOMBARD STREET. 



55 



they never asked that sovereigns should be given 
for them. But the acceptance of a great liability 
during an augmenting alarm, though not as bad 
as an equal advance of cash, is the thing next 
worst. At any moment the cash may be 
demanded. Supposing the panic to grow, it will 
be demanded, and the reserve will be lessened 
accordingly. 

No doubt all precautions may, in the end, be 
unavailing. ' On extraordinary occasions/ says 
Ricardo, ' a general panic may seize the country, 
when every one becomes desirous of possessing 
himself of the precious metals as the most conveni- 
ent mode of realising or concealing his property, — 
against such panic banks have no security on any 
system' The bank or banks which hold the 
reserve may last a little longer than the others ; 
.but if apprehension pass a certain bound, they 
must perish too. The use of credit is, that it 
enables debtors to use a certain part of the money 
their creditors have lent them. If all those 
creditors demand all that money at once, they 
cannot have it, for that which their debtors have 
used, is for the time employed, and not to be 
obtained. With the advantages of credit we must 
take the disadvantages too ; but to lessen them as 
much as we can, we must keep a great store of 



56 A GENERAL VIEW OF LOMBARD STREET. 

ready money always available, and advance out of 
it very freely in periods of panic, and in times of 
incipient alarm. 

The management of the Money Market is the 
more difficult, because, as has been said, periods 
of internal panic and external demand for bullion 
commonly occur together. The foreign drain 
empties the Bank till, and that emptiness, and the 
resulting rise in the rate of discount, tend to 
frighten the market. The holders of the reserve 
have, therefore, to treat two opposite maladies at 
once — one requiring stringent remedies, and 
especially a rapid rise in the rate of interest ; and 
the other, an alleviative treatment with large and 
ready loans. 

Before we had much specific experience, it was 
not easy to prescribe for this compound disease ; 
but now we know how to deal with it. We must 
look first to the foreign drain, and raise the rate 
of interest as high as may be necessary, Unless 
you can stop the foreign export, you cannot allay 
the domestic alarm. The Bank will get poorer 
and poorer, and its poverty will protract or renew 
the apprehension. And at the rate of interest so 
raised, the holders — one or more — of the final 
Bank reserve must lend freely. Very large loans 
at very high rates are the best remedy for the 



A GENERAL VIEW OF LOMBARD STREET. 57 

worst malady of the money market when a foreign 
drain is added to a domestic drain. Any notion 
that money is not to be had, or that it may not be 
had at any price, only raises alarm to panic and 
enhances panic to madness. But though the 
rule is clear, the greatest delicacy, the finest and 
best skilled judgment, are needed to deal at once 
with such great and contrary evils. 

And great as is the delicacy of such a problem in 
all countries, it is far greater in England now than 
it was or is elsewhere. The strain thrown by 
a panic on the final bank reserve is proportional 
to the magnitude of a country's commerce, and to 
the number and size of the dependent banks — 
banks, that is, holding no cash reserve — that are 
grouped around the central bank or banks. And 
in both respects our system causes a stupendous 
strain. The magnitude of our commerce, and the 
number and magnitude of the banks which depend 
on the Bank of England, are undeniable. There 
are very many more persons under great liabilities 
than there are, or ever were, anywhere else. At 
the commencement of every panic, all persons 
under such liabilities try to supply themselves 
with the means of meeting those liabilities while 
they can. This causes a great demand for new 
loans And so far from being able to meet it, die 



58 A GENERAL VIEW OF LOMBARD STREET. 

bankers who do not keep an extra reserve at that 
time borrow largely, or do not renew large loans 
— very likely do both. 

London bankers, other than the Bank of 
England, effect this in several ways. First, they 
have probably discounted bills to a large amount for 
the bill brokers, and if these bills are paid, they 
decline discounting any others to replace them. 
The directors of the London and Westminster 
Bank had, in the panic of 1857, discounted millions 
of such bills, and they justly said that if those 
bills were paid they would have an amount of 
cash far more than sufficient for any demand.* 
But how were those bills to be paid ? Some one 
else must lend the money to pay them. The mer- 
cantile .community could not on a sudden bear to 
lose so large a sum of borrowed money ; they have 
been used to rely on it, and they could not carry 
on their business without it. Least of all could 
they bear it at the beginning of a panic, when 
everybody wants more money than usual. Speak- 
ing broadly, those bills can only be paid by the dis- 
count of other bills. When the bills (suppose) of a 
Manchester warehouseman which he gave to the 
manufacturer become due, he cannot, as a rule, pay 
for them at once in cash ; he has bought on credit, 

■* See Note B. at the end of the volume. 



A GENERAL VIEW OF LOMBARD STREET. 



S9 



and he has sold on credit. He is but a middle- 
man. To pay his own bill to the maker of the 
goods, he must discount the bills he has received 
from the shopkeepers to whom he has sold the 
goods ; but if there is a sudden cessation in the 
means of discount, he will not be able to discount 
them. All our mercantile community must obtain 
new loans to pay old debts. If some one else did 
not pour into the market the money which the 
banks like the London and Westminster Bank 
take out of it, the bills held by the London and 
Westminster Bank could not be paid. 

Who then is to pour in the new money ? 
Certainly not the bill brokers. They have 
been used to re-discount with such banks as 
the London and Westminster millions of bills, 
and if they see that they are not likely to be 
able to re-discount those bills, they instantly 
protect themselves and do not discount them. 
Their business does not allow them to keep much 
cash unemployed. They give interest for all the 
money deposited with them — an interest often 
nearly approaching the interest they can charge ; 
as they can only keep a small reserve a panic tells 
on them more quickly than on anyone else. They 
stop their discounts, or much diminish their dis- 
counts, immediately. There is no new money to 



60 A GENERAL VIEW OF LOMBARD STREET. 

be had from them, and the only place at which they 
can have it is the Bank of England. 

There is even a simpler case : the banker who is 
uncertain of his credit, and wants to increase his 
cash, may have money on deposit at the bill 
brokers. If he wants to replenish his reserve, he 
may ask for it, suppose, just when the alarm is 
beginning. But if a great number of persons do this 
very suddenly, the bill brokers will not at once be 
able to pay without borrowing. They have excel- 
lent bills in their case, but these will not be due for 
some days ; and the demand from the more or less 
alarmed bankers is for payment at once and to-day. 
Accordingly the bill broker takes refuge at the 
Bank of England — the only place where at such 
a moment new money is to be had. 

The case is just the same if the banker wants to 
sell Consols, or to call in money lent on Consols. 
These he reckons as part of his reserve. And in 
ordinary times nothing can be better. According 
to the saying, you ' can sell Consols on a Sunday/ 
In a time of no alarm, or in any alarm affecting 
that particular banker only, he can rely on such 
reserve without misgiving. But not so in a 
general panic. Then, if he wants to sell 500,000/. 
worth of Consols, he will not find 500,000/. of 
fresh money ready to come into the market. All 



A GENERAL VIEW OF LOMBARD STREET. Qi 

ordinary bankers are wanting to sell, or thinking 
they may have to sell. The only resource is the 
Bank of England. In a great panic, Consols 
cannot be sold unless the Bank of England will 
advance to the buyer, and no buyer can obtain 
advances on Consols at such a time unless the 
Bank of England will lend to him. 

The case is worse if the alarm is not confined 
to the great towns, but is diffused through the 
country. As a rule, country bankers only keep 
so much barren cash as is necessary for their 
common business. All the rest they leave at the 
bill brokers, or at the interest-giving banks, or 
invest in Consols and such securities. But in a 
panic they come to London and want this money. 
And it is only from the Bank of England that they 
can get it, for all the rest of London want their 
money for themselves. 

If we remember that the liabilities of Lombard 
Street payable on demand are far larger than 
those of any like market, and that the liabilities of 
the country are greater still, we can conceive the 
magnitude of the pressure on the Bank of Eng- 
land when both Lombard Street and the country 
suddenly and at once come upon it for aid. No 
other bank was ever exposed to a demand so 



6 2 A GENERAL VIE W OF LOMBARD STREET. 

formidable, for none ever before kept the banking 
reserve for such a nation as the English. 

The mode in which the Bank of England meets 
this great responsibility is very curious. It un- 
questionably does make enormous advances in 
every panic — 

In 1847 the loans on c private se- £ £ 

curities ' increased from 18,963,000 to 20,409,000 

1857 ditto ditto 20,404,000 to 31,350,000 

1866 ditto ditto 18,507,000 to 33,447,000 

But, on the other hand, as we have seen, though 
the Bank, more or less, does its duty, it does not 
distinctly acknowledge that it is its duty. We are 
apt to be solemnly told that the Banking Depart- 
ment of the Bank of England is only a bank like 
other banks — that it has no peculiar duty in times 
of panic — that it then is to look to itself alone, as 
other banks look. And there is this excuse for 
the Bank. Hitherto questions of banking have 
been so little discussed in comparison with ques- 
tions of currency, that the duty of the Bank in time 
of panic has been put on a wrong ground. 

It is imagined that because bank notes are a 
legal tender, the Bank has some peculiar duty 
to help other people. But bank notes are only 
a legal tender at the Issue Department, not 
at the Banking Department, and the accidental 



A GENERAL VIEW OF LOMBARD STREET. 63 

combination of the two departments in the same 
building gives the Banking Department no aid 
in meeting a panic. If the Issue Department 
were at Somerset House, and if it issued Govern- 
ment notes there, the position of the Banking 
Department under the present law would be 
exactly what it is now. No doubt, formerly the 
Bank of England could issue what it pleased, but 
that historical reminiscence makes it no stronger 
now that it can no longer so issue. We must 
deal with what is, not with what was. 

And a still worse argument is also used. It is 
said that because the Bank of England keeps the 
' State account ' and is the Government banker, it 
is a sort of * public institution ' and ought to help 
everybody. But the custody of the taxes which 
have been collected and which wait to be expended 
is a duty quite apart from panics. The Govern- 
ment money may chance to be much or little when 
the panic comes. There is no relation or connec- 
tion between the two. And the State, in getting 
the Bank to keep what money it may chance to 
have, or in borrowing of it what money it may 
chance to want, does not hire it to stop a panic or 
much help it if it tries. 

The real reason has not been distinctly seen. 
As has been already said — but on account of its 



64 A GENERAL VIEW OF LOMBARD STREET. 

importance and perhaps its novelty it is worth 
saying again — whatever bank or banks keep the 
ultimate banking reserve of the country must lend 
that reserve most freely in time of apprehension, 
for that is one of the characteristic uses of the bank 
reserve, and the mode in which it attains one of 
the main ends for which it is kept. Whether 
rightly or wrongly, at present and in fact the Bank 
of England keeps our ultimate bank reserve, and 
therefore it must use it in this manner. 

And though the Bank of England certainly do 
make great advances in time of panic, yet as they 
do not do so on any distinct principle, they natu- 
rally do it hesitatingly, reluctantly, and with mis- 
giving. In 1847, even in 1866 — the latest panic, 
and the one in which on the whole the Bank 
acted the best — there was nevertheless an instant 
when it was believed the Bank would not advance 
on Consols, or at least hesitated to advance on 
them. The moment this was reported in the 
City and telegraphed to the country, it made the 
panic indefinitely worse. In fact, to make large 
advances in this faltering way is to incur the evil 
of making them without obtaining the advantage. 
What is wanted and what is necessary to stop a 
panic is to diffuse the impression, that though 
money may be dear, still money is to be had. 



A GENERAL VIEW OF LOMBARD STREET. 65 

If people could be really convinced that they 
could have money if they wait a day or two, and 
that utter ruin is not coming, most likely they 
would cease to run in such a mad way for money. 
Either shut the Bank at once, and say it will not 
lend more than it commonly lends, or lend freely, 
boldly, and so that the public may feel you mean 
to go on lending. To lend a great deal, and yet 
not give the public confidence that you will lend 
sufficiently and effectually, is the worst of all pol- 
icies ; but it is the policy now pursued. 

In truth, the Bank do not lend from the 
motives which should make a bank lend. The 
holders of the Bank reserve ought to lend at once 
and most freely in an incipient panic, because 
they fear destruction in the panic. They ought 
not to do it to serve others ; they ought to do it 
to serve themselves. They ought to know that 
this bold policy is the only safe one, and for that 
reason they ought to choose it. But the Bank 
directors are not afraid. Even at the last moment 
they say that ' whatever happens to the commu- 
nity, they can preserve themselves. ' Both in 1847 
and 1857 (I believe also in 1866, though there is 
no printed evidence of it) the Bank directors con- 
tended that the Banking Department was quite 
safe though its reserve was nearly all gone, and 



(5(5 A GENERAL VIEW OF LOMBARD STREET. 

that it could strengthen itself by selling securi- 
ties and by refusing to discount. But this is a 
complete dream. The Bank of England could 
not sell ' securities/ for in an extreme panic there 
is no one else to buy securities. The Bank can- 
not stay still and wait till its bills are paid, and 
so fill its coffers, for unless it discounts equiva- 
lent bills, the bills which it has already discounted 
will not be paid. When the reserve in the ulti- 
mate bank or banks — those keeping the reserve 
■ — runs low, it cannot be augmented by the same 
means that other and dependent banks commonly 
adopt to maintain their reserve, for the dependent 
banks trust that at such moments the ultimate 
banks will be discounting more than usual and 
lending more than usual. But ultimate banks 
have no similar rear-guard to rely upon. 

I shall have failed in my purpose if I have not 
proved that the system of entrusting all our 
reserve to a single board, like that of the Bank 
directors, is very anomalous ; that it is very dan- 
gerous ; that its bad consequences, though much 
felt, have not been fully seen ; that they have been 
obscured by traditional arguments and hidden in 
the dust of ancient controversies. 

But it will be said — What would be better? 
What other system could there be ? We are so 



A GENERAL VIEW OF LOMBARD STREET. 6/ 

accustomed to a system of banking, dependent 
for its cardinal function on a single bank, that 
we can hardly conceive of any other. But the 
natural system — that which would have sprung 
up if Government had let" banking alone — is that 
of many banks of equal or not altogether unequal 
size. In all other trades competition brings the 
traders to a rough approximate equality. In 
cotton spinning, no single firm far and perma- 
nently outstrips the others. There is no tendency 
to a monarchy in the cotton world ; nor, where 
banking has been left free, is there any tendency to 
a monarchy in banking either. In Manchester, in 
Liverpool, and all through England, we have a 
great number of banks, each with a business more 
or less good, but we have no single bank with 
any sort of predominance ; nor is there any such 
bank in Scotland. In the new world of Joint 
Stock Banks outside the Bank of England, we see 
much the same phenomenon. One or more get 
for a time a better business than the others, but 
no single bank permanently obtains an unques- 
tioned predominance. None of them gets so 
much before the others that the others voluntarily 
place their reserves in its keeping. A republic 
with many competitors of a size or sizes suitable 
to the business, is the constitution of every trade 



68 A GENERAL VIE IV OF LOMBARD STREET. 

if left to itself, and of banking as much as any 
other. A monarchy in any trade is a sign of 
some anomalous advantage, and of some inter- 
vention from without. 

I shall be at once asked — Do you propose a 
revolution ? Do you propose to abandon the one- 
reserve system, and create anew a many-reserve 
system? My plain answer is that I do not 
propose it. I know it would be childish. Credit 
in business is like loyalty in Government. You 
must take what you can find of it, and work with 
it if possible. A theorist may easily map out a 
scheme of Government in which Queen Victoria 
could be dispensed with. He may make a theory 
that, since we admit and we know that the House 
of Commons is the real sovereign, any other sover- 
eign is superfluous ; but for practical purposes, 
it is not even worth while to examine these argu- 
ments. Queen Victoria is loyally obeyed — without 
doubt, and without reasoning — by millions of 
human beings. If those millions began to argue, it 
would not be easy to persuade them to obey Queen 
Victoria, or anything else. Effectual arguments 
to convince the people who need convincing are 
wanting. Just so, an immense system of credit, 
founded on the Bank of England as its pivot and 
its basis, now exists. The English people, and 



A GENERAL VIEW OF LOMBARD STREET. £g 

foreigners too, trust it implicitly. Every banker 
knows that if he has to prove that he is worthy of 
credit, however good may be his arguments, in fact 
his credit is gone : but what we have requires no 
proof. The whole rests on an instinctive confidence 
generated by use and years. Nothing would 
persuade the English people to abolish the Bank 
of England ; and if some calamity swept it away, 
generations must elapse before at all the same 
trust would be placed in any other equivalent. 
A many-reserve system, if some miracle should 
put it down in Lombard Street, would seem mon- 
strous there. Nobody would understand it, or 
confide in it. Credit is a power which may grow, 
but cannot be constructed. Those who live 
under a great and firm system of credit must 
consider that if they break up that one they will 
never see another, for it will take years upon 
years to make a successor to it. 

On this account, I do not suggest that we 
should return to a natural or many-reserve system 
of banking. I should only incur useless ridicule 
if I did suggest it. Nor can I propose that we 
should adopt the simple and straightforward 
expedient by which the French have extricated 
themselves from the same difficulty. In France 
all banking rests on the Bank of France, even 



70 



A GENERAL VIEW OF LOMBARD STREET. 



more than in England all rests on the Bank of 
England. The Bank of France keeps the final 
banking reserve, and it keeps the currency reserve 
too. But the State does not trust such a function 
to a board of merchants, named by shareholders. 
The nation itself — the Executive Government — ■ 
names the governor and deputy-governor of the - 
Bank of France. These officers have, indeed, 
beside them a council of ' regents,' or directors, 
named by the shareholders. But they need not 
attend to that council unless they think fit ; they are 
appointed to watch over the national interest, and, 
in so doing, they may disregard the murmurs of 
the ' regents ■ if they like. And in theory, there is 
much to be said for this plan. The keeping the 
single banking reserve being a national function, 
it is at least plausible to argue that Government 
should choose the functionaries. No doubt such 
a political intervention is contrary to the sound 
economical doctrine that ' banking is a trade, and 
only a trade/ But Government forgot that 
doctrine when, by privileges and monopolies, it 
made a single bank predominant over all others, 
and established the one-reserve system. As that 
system exists, a logical Frenchman consistently 
enough argues that the State should watch and 
manage it. But no such plan would answer in 



A GENERAL VIEW OF LOMBARD STREET, 



n 



England. We have not been trained to care for 
logical sequence in our institutions, or rather we 
have been trained not to care for it. And the 
practical result for which we do care would in thi? 
case be bad. The governor of the Bank would 
be a high Parliamentary official, perhaps in the 
Cabinet, and would change as chance majorities 
and the strength of parties decide. A trade 
peculiarly requiring consistency and special attain- 
ment would be managed by a shifting and un- 
trained ruler. In fact, the whole plan would seem 
to an Englishman of business palpably absurd ; 
he would not consider it, he would not think it 
worth considering. That it works fairly well in 
France, and that there are specious arguments of 
theory for it, would not be sufficient to his mind. 

All such changes being out of the question, I 
can propose only three remedies. 

First. There should be a clear understanding 
between the Bank and the public that, since the 
Bank hold our ultimate banking reserve, they will 
recognise and act on the obligations which this 
implies ; — that they will replenish it in times of 
foreign demand as fully, and lend it in times of 
internal panic as freely and readily, as plain prin- 
ciples of banking require. 

This looks very different from the French plan, 



7 2 A GENERAL VIEW OF LOMBARD STREET. 

but it is not so different in reality. In England we 
can often effect, by the indirect compulsion of 
opinion, what other countries must effect by the 
direct compulsion of Government. We can do so 
in this case. The Bank directors now fear public 
opinion exceedingly ; probably no kind of persons 
are so sensitive to newspaper criticism. And this 
is very natural. Our statesmen, it is true, 
are much more blamed, but they have generally 
served a long apprenticeship to sharp criticism. 
If they still care for it (and some do after years of 
experience much more than the world thinks), 
they care less for it than at first, and have come to 
regard it as an unavoidable and incessant irritant, 
of which they shall never be rid. But a bank 
director undergoes no similar training and harden- 
ing. His functions at the Bank fill a very small part 
of his time ; all the rest of his life (unless he be in 
Parliament) is spent in retired and mercantile 
industry. He is not subjected to keen and 
public criticism, and is not taught to bear it. 
Especially when once in his life he becomes, by 
rotation, governor, he is most anxious that the 
two years of office shall ' go off well/ He is apt 
to be irritated even by objections to the prin- 
ciples on which he acts, and cannot bear with 
equanimity censure which is pointed and personal 



A GENERAL VIE W OF LOMBARD STREET. 



73 



At present I am not sure if this sensitive- 
ness is beneficial. As the exact position of the 
Bank of England in the Money Market is 
indistinctly seen, there is no standard to which a 
Bank governor can appeal. He is always in fear 
that ' something may be said ; ' but not quite 
knowing on what side that ' something ' may be, 
his fear is but an indifferent guide to him. But if 
the cardinal doctrine were accepted, if it were 
acknowledged that the Bank is charged with the 
custody of our sole banking reserve, and is 
bound to deal with it according to admitted 
principles, then a governor of the Bank could look 
to those principles. He would know which way 
criticism was coming. If he was guided by the 
code, he would have a plain defence. And then 
we may be sure that old men of business would 
not deviate from the code. At present the 
Board of Directors are a sort of ^;/zz-trustees for 
the nation. I would have them real trustees, 
and with a good trust deed. 

Secondly. The government of the Bank should 
be improved in a manner to be explained. We 
should diminish the ' amateur ' element ; we 
should augment the trained banking element ; and 
we should ensure more constancy in the adminis- 
tration. 

4 



74 



A GENERAL VIEW OF LOMBARD STREET. 



Thirdly. As these two suggestions are designed 
to make the Bank as strong as possible, we should 
look at the rest of our banking system, and try 
to reduce the demands on the Bank as much as 
we can. The central machinery being inevitably 
frail, we should carefully and as much as possible 
diminish the strain upon it. 

But to explain these proposals, and to gain a 
full understanding of many arguments that have 
been used, we must look more in detail at the 
component parts of Lombard street, and at the 
curious set of causes which have made it assume 
its present singular structure. 



75 



CHAPTER III. 

HOW LOMBARD STREET CAME TO EXIST, AND WHY 
IT ASSUMED ITS PRESENT FORM. 

In the last century, a favourite subject of literary 
ingenuity was * conjectural history/ as it was then 
called. Upon grounds of probability a fictitious 
sketch was made of the possible origin of things 
existing. If this kind of speculation were now 
applied to banking, the natural and first idea would 
be that large systems of deposit banking grew up 
in the early world, just as they grow up now in 
any large English colony. As soon as any such 
community becomes rich enough to have much 
money, and compact enough to be able to lodge 
its money in single banks, it at once begins so to 
do. English colonists do not like the risk of 
keeping their money, and they wish to make an 
interest on it. They carry from home the idea 
and the habit of banking, and they take to it as 
soon as they can in their new world. Conjectural 



76 HOW LOMBARD STREET CAME TO EXIST, AND 

history would be inclined to say that all banking 
began thus : but such history is rarely of any value. 
The basis of it is false. It assumes that what 
works most easily when established is that which 
it would be the most easy to establish, and that 
what seems simplest when familiar would be most 
easily appreciated by the mind though unfa- 
miliar. But exactly the contrary is true. Many 
things which seem simple and which work well 
when firmly established, are very hard to establish 
among new people, and not very easy to explain 
to them. Deposit banking is of this sort. Its 
essence is that a very large number of persons 
agree to trust a very few persons, or some one 
person. Banking would not be a profitable trade 
if bankers were not a small number, and deposi- 
tors in comparison an immense number. But to 
get a great number of persons to do exactly the 
same thing is always very difficult, and nothing 
but a very palpable necessity will make them 
on a sudden begin to do it. And there is 
no such palpable necessity in banking. If you 
take a country town in France, even now, you 
will not find any such system of banking as ours. 
Cheque-books are unknown, and money kept on 
running account by bankers is rare. People store 
their money in a caisse at their houses. Steady 



WHY IT ASSUMED ITS PRESENT FORM. jj 

savings, which are waiting for investment, and 
which are sure not to be soon wanted, may be 
lodged with bankers ; but the common floating 
cash of the community is kept by the commu- 
nity themselves at home. They prefer to keep 
it so, and it would not answer a banker's purpose 
to make expensive arrangements for keeping it 
otherwise. If a ' branch/ such as the National 
Provincial Bank opens in an English country 
town, were opened in a corresponding French 
one, it would not pay its expenses. You could 
not get any sufficient number of Frenchmen to 
agree to put their money there. And so it is 
in all countries not of British descent, though 
in various degrees. Deposit banking is a ver) 
difficult thing to begin, because people do not 
like to let their money out of their sight, espe- 
cially do not like to let it out of sight without 
security — still more, cannot all at once agree on 
any single person to whom they are content to 
trust it unseen and unsecured. Hypothetical 
history, which explains the past by what is 
simplest and commonest in the present, is in 
banking, as in most things, quite untrue. 

The real history is very different. New wants 
are mostly supplied by adaptation, not by creation 
or foundation. Something having been created 



78 HOW LOMBARD STREET CAME TO EXIST, AND 

to satisfy an extreme want, it is used to satisfy 
less pressing wants, or to supply additional con- 
veniences. On this account, political Government 
— the oldest institution in the world — has been the 
hardest worked. At the beginning of history, we 
find it doing everything which society wants done, 
and forbidding everything which society does not 
wish done. In trade, at present, the first com- 
merce in a new place is a general shop, which, 
beginning with articles of real necessity, comes 
shortly to supply the oddest accumulation of petty 
comforts. And the history of banking has been 
the same. The first banks were not founded for 
our system of deposit banking, or for anything like 
it. They were founded for much more pressing 
reasons, and having been founded, they, or copies 
from them, were applied to our modern uses. 

The earliest banks of Italy, where the name 
began, were finance companies. The Bank of St. 
George, at Genoa, and other banks founded in 
imitation of it, were at first only companies to make 
loans to, and float loans for, the Governments of 
the cities in which they were formed. The want of 
money is an urgent want of Governments at most 
periods, and seldom more urgent than it was in the 
tumultuous Italian Republics of the Middle Ages. 
After these banks had been long established, 



WHY IT ASSUMED ITS PRESENT FORM. 



79 



they began to do what we call banking business ; 
but at first they never thought of it. The great 
banks of the North of Europe had their origin in 
a want still more curious. The notion of its 
being a prime business of a bank to give good 
coin has passed out of men's memories ; but 
wherever it is felt, there is no want of business 
more keen and urgent. Adam Smith describes 
it so admirably that it would be stupid not to 
quote his words: — 'The currency of a great 
state, such as France or England, generally 
consists almost entirely of its own coin. Should 
this currency, therefore, be at any time worn, 
dipt, or otherwise degraded below its standard 
value, the state by a reformation of its coin 
can effectually re-establish its currency. But 
the currency of a small state, such as Genoa or 
Hamburgh, can seldom consist altogether in its 
own coin, but must be made up, in a great measure, 
of the coins of all the neighbouring states with 
which its inhabitants have a continual intercourse. 
Such a state, therefore, by reforming its coin, will 
not always be able to reform its currency. If 
foreign bills of exchange are paid in this currency, 
the uncertain value of any sum, of what is in its 
own nature so uncertain, must render the exchange 
always very much against such a state, its cur- 



So HOW LOMBARD STREET CAME TO EXIST, AND 

rency being, in all foreign states, necessarily val- 
ued even below what it is worth. 

' In order to remedy the inconvenience to which 
this disadvantageous exchange must have sub- 
jected their merchants, such small states, when 
they began to attend to the interest of trade, have 
frequently enacted, that foreign bills of exchange 
of a certain value should be paid, not in common 
currency, but by an order upon, or by a transfer 
in, the books of a certain bank, established upon 
the credit, and under the protection of the state, 
this bank being always obliged to pay, in good 
and true money, exactly according to the standard 
of the state. The banks of Venice, Genoa, 
Amsterdam, Hamburgh and Nuremburg, seem to 
have been all originally established with this view, 
though some of them may have afterwards been 
made subservient to other purposes. The money 
of such banks, being better than the common cur- 
rency of the country, necessarily bore an agio, 
which was greater or smaller, according as the 
currency was supposed to be more or less degraded 
below the standard of the state. The agio of the 
bank of Hamburgh, for example, which is said to 
be commonly about fourteen per cent., is the sup- 
posed difference between the good standard money 
of the state, and the dipt, worn, and diminished 



WHY IT ASSUMED ITS PRESENT FORM. 8 1 

currency poured into it from all the neighbouring 
states. 

1 Before 1609 the great quantity of dipt and worn 
foreign coin, which the extensive trade of Am- 
sterdam brought from all parts of Europe, reduced 
the value of its currency about 9 per cent, 
below that of good money fresh from the mint. 
Such money no sooner appeared than it was 
melted down or carried away, as it always is in 
such circumstances. The merchants, with plenty 
of currency, could not always find a sufficient 
quantity of good money to pay their bills of 
exchange ; and the value of those bills, in spite of 
several regulations which were made to prevent 
it, became in a great measure uncertain. 

' In order to remedy these inconveniences, a bank 
was established in 1609 under the guarantee of the 
City. This bank received both foreign coin, and 
the light and worn coin of the country at its real 
intrinsic value in the good standard money of the 
country, deducting only so much as was necessary 
for defraying the expense of coinage, and the 
other necessary expense of management. For 
the value which remained, after this small deduc- 
tion was made, it gave a credit in its books. 
This credit was called bank money, which, as it 
represented money exactly according to the 



82 HOW LOMBARD STREET CAME TO EXIST, AND 

standard of the mint, was always of the same real 
value, and intrinsically worth more than current 
money. It was at the same time enacted, that 
all bills drawn upon or negotiated at Amsterdam 
of the value of six hundred guilders and upwards 
should be paid in bank money, which at once took 
away all uncertainty in the value of those bills. ' 
Every merchant, in consequence of this regulation, 
was obliged to keep an account with the bank in 
order to pay his foreign bills of exchange, which 
necessarily occasioned a certain demand for bank 
money/ * 

Again, a most important function of early 
banks is one which the present banks retain, 
though it is subsidiary to their main use ; 
viz. the function of remitting money. A man 
brings money to the bank to meet a pay- 
ment which he desires to make at a great dis- 
tance, and the bank, having a connection with 
other banks, sends it where it is wanted. As 
soon as bills of exchange are given upon a large 
scale, this remittance is a very pressing require- 
ment. Such bills must be made payable at a place 
convenient to the seller of the goods in payment 

* Smith's ' Wealth of Nations/ Book IV. chap. iii. i Digression 
concerning Banks of Deposit/ &c. 



WHY IT ASSUMED ITS PRESENT FORM. 8^ 

of which they are given, perhaps at the great town 
where his warehouse is. But this may be very 
far from the retail shop of the buyer who bought 
those goods to sell them again in the country. 
For these, and a multitude of purposes, the instant 
and regular remittance of money is an early neces- 
sity of growing trade ; and that remittance it war 
a first object of early banks to accomplish. 

These are all uses other than those of deposit 
banking which banks supplied that afterwards 
became in our English sense deposit banks. By 
supplying these uses, they gained the credit that 
afterwards enabled them to gain a living as deposit 
banks. Being trusted for one purpose, they came 
to be trusted for a purpose quite different, ulti- 
mately far more important, though at first less 
keenly pressing. But these wants only affect a few 
persons, and therefore bring the bank under the 
notice of a few only. The real introductory func- 
tion which deposit banks at first perform is much 
more popular, and it is only when they can per- 
form this more popular kind of business that de- 
posit banking ever spreads quickly and extensively. 
This function is the supply of the paper circula- 
tion to the country, and it will be observed that 
I am not about to overstep my limits and discuss 



84 HOW LOMBARD STREET CAME TO EXIST, AND 

this as a question of currency. In what form the 
best paper currency can be supplied to a country 
is a question of economical theory with which I 
do not meddle here. I am only narrating un- 
questionable history, not dealing with an argu- 
ment where every step is disputed. And part of 
this certain history is that the best way to diffuse 
banking in a community is to allow the banker to 
issue bank-notes of small amount that can super- 
sede the metal currency. This amounts to a 
subsidy to each banker to enable him to keep 
open a bank till depositors choose to come to it. 
The country where deposit banking is most dif- 
fused is Scotland, and there the original profits 
were entirely derived from the circulation. The 
note issue is now a most trifling part of the liabili- 
ties of the Scotch banks, but it was once their 
mainstay and source of profit. A curious book, 
lately published, has enabled us to follow the 
course of this in detail. The Bank of Dundee, 
now amalgamated with the Royal Bank of Scot- 
land, was founded in 1763, and had become before 
its amalgamation, eight or nine years since, a bank 
of considerable deposits. But for twenty-five 
years from its foundation it had no deposits at all. 
It subsisted mostly on its note issue, and a little 
on its remittance business. Only in 1792, after 



WHY IT ASSUMED ITS PRESENT FORM. 85 

nearly thirty years, it began to gain deposits, but 
from that time they augmented very rapidly.* The 
banking history of England has been the same, 
though we have no country bank accounts in de- 
tail which go back so far. But probably up to 1830 
in England, or thereabouts, the main profit oi 
banks was derived from the circulation, and for 
many years after that the deposits were treated as 
very minor matters, and the whole of so-called 
banking discussion turned on questions of circula- 
tion. We are still living in the debris of that con- 
troversy, for, as I have so often said, people can 
hardly think of the structure of Lombard Street, 
except with reference to the paper currency and to 
the Act of 1844, which regulates it now. The 
French are still in the same epoch of the subject. 
Their great enquete of 1865 is almost wholly taken 
up with currency matters, and mere banking is 
treated as subordinate. And the accounts of the 
Bank of France show why. The last weekly state- 
ment before the German war showed that the cir- 
culation of the Bank of France was as much as 
59,244,000/., and that the private deposits were 
only 17,127,000/. Now the private deposits are 
about the same, and the circulation is 1 12,000,000/. 
So difficult is it in even a great country like France 

* See Note C in Appendix. 



86 HOW LOMBARD STREET CAME TO EXIST, AND 

for the deposit system of banking to take root, and 
establish itself with the strength and vigour that it 
has in England. 

The experience of Germany is the same. The 
accounts preceding the war in North Germany 
showed the circulation of the issuing banks to be 
39,875,000/., and the deposits to be 6,472,000/. 
while the corresponding figures at the present 
moment are — circulation, 60,000,000/. and deposits 
8,000,000/. It would be idle to multiply instances. 

The reason why the use of bank paper com- 
monly precedes the habit of making deposits in 
banks is very plain. It is a far easier habit to 
establish. In the issue of notes the banker, the 
person to be most benefited, can do something. 
He can pay away his own ' promises ' in loans, in 
wages, or in payment of debts. But in the get- 
ting of deposits he is passive. His issues depend 
on himself; his deposits on the favour of others. 
And to the public the change is far easier too. 
To collect a great mass of deposits with the same 
banker, a great number of persons must agree to 
do something. But to establish a note circulation, 
a large number of persons need only do nothing. 
They receive the banker's notes in the common 
course of their business, and they have only not 
to take those notes to the banker for payment, 



WHY IT ASSUMED ITS PRESENT FORM. 



8 7 



If the public refrain from taking trouble, a paper 
circulation is immediately in existence. A paper 
circulation is begun by the banker, and requires 
no effort on the part of the public ; on the con- 
trary, it needs an effort of the public to be rid of 
notes once issued ; but deposit banking cannot be 
begun by the banker, and requires a spontaneous 
and consistent effort in the community. And 
therefore paper issue is the natural prelude to 
deposit banking. 

The way in which the issue of notes by a 
banker prepares the way for the deposit of money 
with him is very plain. When a private person 
begins to possess a great heap of bank-notes, it 
will soon strike him that he is trusting the banker 
very much, and that in return he is getting 
nothing. He runs the risk of loss and robbery 
just as if he were hoarding coin. He would run no 
more risk by the failure of the bank if he made a 
deposit there, and he would be free from the risk 
of keeping the cash. No doubt it takes time before 
even this simple reasoning is understood by un- 
educated minds. So strong is the wish of most 
people to see their money that they for some time 
continue to hoard'bank-notes : for a long period a 
few do so. But in the end common sense con- 
quers. The circulation of bank-notes decreases, 



88 HOW LOMBARD STREET CAME TO EXIST, AND 

and the deposit of money with the banker in* 

creases. The credit of the banker having been 

efficiently advertised by the note, and accepted by 

the public, he lives on the credit so gained years 

after the note issue itself has ceased to be very 

important to him. 

The efficiency of this introduction is proportional 

to the diffusion of the right of note issue. A single 

monopolist issuer, like the Bank of France, works 

its way with difficulty through a country, and 

advertises banking very slowly. Even now the 

Bank of France, which, I believe, by law ought to 

have a branch in each Department, has only 

branches in sixty out of eighty-six. On the other 

hand, the Swiss banks, where there is always one 

or more to every Canton, diffuse banking rapidly. 

We have seen that the liabilities of the Bank of 

France stand thus : 

£ 

Notes 112,000,000 

Deposits 15,000,000 

But the aggregate Swiss banks, on the contrary, 

stand : — 

£ 

Notes 761,000 

Deposits 4,709,000* 

The reason is that a central bank, which is 

* These are the amounts at December 31, 1865. See ' Grundzuge 
der National- Oekonomie. Von Max Wirth.' Dritter Band, p. 491. 



WHY IT ASSUMED ITS PRESENT FORM. %g 

governed in the capital and descends on a country 
district, has much fewer modes of lending money 
safely than a bank of which the partners belong 
to that district, and know the men and things in it. 
A note issue is mainly begun by loans ; there are 
then no deposits to be paid. But the mass of 
loans in a rural district are of small amount ; the 
bills to be discounted are trifling ; the persons bor- 
rowing are of small means and only local repute ; 
the value of any property they wish to pledge de- 
pends on local changes and local circumstances. A 
banker who lives in the district, who has always 
lived there, whose whole mind is a history of the 
district and its changes, is easily able to lend 
money safely there. But a manager deputed by a 
single central establishment does so with difficulty. 
The worst people will come to him and ask for 
loans. His ignorance is a mark for all the shrewd 
and crafty people thereabouts. He will have 
endless difficulties in establishing the circulation 
of the distant bank, because he has not the local 
knowledge which alone can teach him how to 
issue that circulation with safety. 

A system of note issues is therefore the best 
introduction to a large system of deposit banking. 
As yet, historically, it is the only introduction : 
no nation as yet has arrived at a great system of 



9 o HOW LOMBARD STREET CAME TO EXIST, AND 

deposit banking without going first through the 
preliminary stage of note issue, and of such note 
issues the quickest and most efficient in this way- 
is one made by individuals resident in the district, 
and conversant with it. 

And this explains why deposit banking is so 
rare. Such a note issue as has been described is 
possible only in a country exempt from invasion, 
and free from revolution. During an invasion 
note-issuing banks must stop payment ; a run is 
nearly inevitable at such a time, and in a revolu- 
tion too. In such great and close civil dangers 
a nation is always demoralised ; everyone looks 
to himself, and everyone likes to possess him- 
self of the precious metals. These are sure to 
be valuable, invasion or no invasion, revolution or 
no revolution. But the goodness of bank-notes 
depends on the solvency of the banker, and that 
solvency may be impaired if the invasion is not 
repelled or the revolution resistedf 

Hardly any continental country has been till 
now exempt for long periods both from invasion 
and revolution. In Holland and Germany — two 
countries where note issue and deposit banking 
would seem as natural as in England and Scot- 
land — there was never any security from foreign 
war. A profound apprehension of external in- 



WHY IT ASSUMED ITS PRESENT FORM. 



91 



vasion penetrated their whole habits, and men of 
business would have thought it insane not to con- 
template a contingency so frequent in their history, 
and perhaps witnessed by themselves. 

France indeed, before 1789, was an exception. 
For many years under the old regime she was 
exempt from serious invasion or attempted revo- 
lution. Her Government was fixed, as was then 
thought, and powerful ; it could resist any external 
enemy, and the prestige on which it rested seemed 
too firm to fear any enemy from within. But 
then it was not an honest Government, and it had 
shown its dishonesty in this particular matter of 
note issue. The regent in Law's time had given 
a monopoly of note issue to a bad bank, and had 
paid off the debts of the nation in worthless paper. 
The Government had created a machinery of 
ruin, and had thriven on it. Among so appre- 
hensive a race as the French the result was fatal. 
For many years no attempt at note issue or 
deposit banking was possible in France. So late 
as the foundation of the Caisse d'Escompte, in 
Turgot's time, the remembrance of Law's failure 
was distinctly felt, and impeded the commence- 
ment of better attempts. 

This therefore is the reason why Lombard 
Street exists ; that is, why England is a very 



g 2 HOW LOMBARD STREET CAME TO EXIST, AND 

great Money Market, and other European coun- 
tries but small ones in comparison. In England 
and Scotland a diffused system of note issues 
started banks all over the country ; in these banks 
the savings of the country have been lodged, and 
by these they have been sent to London. No 
similar system arose elsewhere, and in conse- 
quence London is full of money, and all conti- 
nental cities are empty as compared with it 

ii. 

The monarchical form of Lombard Street is 
due also to the note issue. The origin of the 
Bank of England has been told by Macaulay, and 
it is never wise for an ordinary writer to tell 
again what he has told so much better. Nor is it 
necessary, for his writings are in everyone's 
hands. Still I must remind my readers of the 
curious story. 

Of all institutions in the world the Bank of 
England is now probably the most remote from 
party politics and from 'financing/ But in its 
origin it was not only a finance company, but a 
Whig finance company. It was founded by a 
Whig Government because it was in desperate 
want of money, and supported by the ' City ' 
because the ' City ' was Whig. Very briefly, the 



WHY IT ASSUMED ITS PRESENT FORM. 93 

story was this. The Government of Charles II. 
(under the Cabal Ministry) had brought the credit 
of the English State to the lowest possible point. 
It had perpetrated one of those monstrous frauds, 
which are likewise gross blunders. The gold- 
smiths, who then carried on upon a trifling scale 
what we should now call banking, used to deposit 
their reserve of treasure in the ' Exchequer/ with 
the sanction and under the care of the Govern- 
ment. In many European countries the credit of 
the State had been so much better than any other 
credit, that it had been used to strengthen the 
beginnings of banking. The credit of the state had 
been so used in England : though there had lately 
been a civil war and several revolutions, the honesty 
of the English Government was trusted implicitly. 
But Charles II. showed that it was trusted unde- 
servedly. He shut up the ' Exchequer/ would 
pay no one, and so the ' goldsmiths ' were ruined. 
The credit of the Stuart Government never 
recovered from this monstrous robbery, and the 
Government created by the Revolution of 1688 
could hardly expect to be more trusted with 
money than its predecessor. A Government 
created by a revolution hardly ever is. There is 
a taint of violence which capitalists dread instinc- 
tively, and there is always a rational apprehension 



94 HOW LOMBARD STREET CAME TO EXIST, AND 

that the Government which one revolution 
thought fit to set up another revolution may think 
fit to pull down. In 1694, the credit of William 
III/s Government was so low in London that it 
was impossible for it to borrow any large sum ; 
and the evil was the greater, because in conse- 
quence of the French war the financial straits of 
the Government were extreme. At last a scheme 
was hit upon which would relieve their necessities. 
' The plan/ says Macaulay, ' was that twelve 
hundred thousand pounds should be raised at 
what was then considered as the moderate rate of 
8 per cent/ In order to induce the subscribers to 
advance the money promptly on terms so un- 
favourable to the public, the subscribers were to 
be incorporated by the name of the Governor and 
Company of the Bank of England. They were 
so incorporated, and the 1,200,000/. was obtained. 
On many succeeding occasions, their credit was 
of essential use to the Government. Without 
their aid, our National Debt could not have been 
borrowed ; and if we had not been able to raise 
that money we should have been conquered by 
France and compelled to take back James II. 
And for many years afterwards the existence of 
that debt was a main reason why the industrial 
classes never would think of recalling the 



WHY IT ASSUMED ITS PRESENT FORM. 



95 



Pretender, or of upsetting the revolution settle- 
ment. The ' fund-holder ' is always considered 
in the books of that time as opposed to his 
1 legitimate ' sovereign, because it was to be 
feared that this sovereign would repudiate the 
debt which was raised by those who dethroned 
him, and which was spent in resisting him and his 
allies. For a long time the Bank of England 
was the focus of London Liberalism, and in that 
capacity rendered to the State inestimable ser- 
vices. In return for these substantial benefits 
the Bank of England received from the Govern- 
ment, either at first or afterwards, three most 
important privileges. 

First. The Bank of England had the exclusive 
possession of the Government balances. In its 
first period, as I have shown, the Bank gave credit 
to the Government, but afterwards it derived 
credit from the Government. There is a natural 
tendency in men to follow the example of the 
Government under which they live. The Govern- 
ment is the largest, most important, and most con- 
spicuous entity with which the mass of any people 
are acquainted ; its range of knowledge must 
always be infinitely greater than the average of 
their knowledge, and therefore, unless there is a 
conspicuous warning to the contrary, most men are 



Cfi HOW LOMBARD STREET CAME TO EXIST, AND 

inclined to think their Government right, and, 
when they can, to do what it does. Especially in 
money matters a man might fairly reason — ' If the 
Government is right in trusting the Bank of 
England with the great balance of the nation, I 
cannot be wrong in trusting it with my little 
balance.' 

Second. The Bank of England had, till lately, 
the monopoly of limited liability in England. The 
common law of England knows nothing of any 
such principle. It is only possible by Royal 
Charter or Statute Law. And by neither of these 
was any real bank (I do not count absurd schemes 
such as Chamberlayne's Land Bank) permitted 
with limited liability in England till within these 
few years. Indeed, a good many people thought 
it was right for the Bank of England, but not 
right for any other bank. I remember hearing the 
conversation of a distinguished merchant in the 
City of London, who well represented the ideas 
then most current. He was declaiming against 
banks of limited liability, and some one asked — 
' Why, what do you say, then, to the Bank of 
England, where you keep your own account ? ' 
* Oh ! ' he replied, ? that is an exceptional case/ 
And no doubt it was an exception of the greatest 
value to the Bank of England, because it induced 



WHY IT ASSUMED ITS PRESENT FORM, 



07 



many quiet and careful merchants to be directors 
of the Bank, who certainly would not have joined 
any bank where all their fortunes were liable, and 
where the liability was not limited. 

Thirdly. The Bank of England had the privi- 
lege of being the sole joint stock company per- 
mitted to issue bank notes in England. Private 
London bankers did indeed issue notes down to 
the middle of the last century, but no joint stock 
company could do so. The explanatory clause of 
the Act of 1742 sounds most curiously to our 
modern ears. ' And to prevent any doubt that 
may arise concerning the privilege or power given 
to the said governor and company y — that is, the 
Bank of England — ' of exclusive banking ; and 
also in regard to creating any other bank or banks 
by Parliament, or restraining other persons from 
banking during the continuance of the said privi- 
lege granted to the governor and company of the 
Bank of England, as before recited ; — it is hereby 
further enacted and declared by the authority 
aforesaid, that it is the true intent and meaning of 
the said Act that no other bank shall be created, 
established, or allowed by Parliament, and that it 
shall not be lawful for any body politic or corporate 
whatsoever created or to be created, or for any 

other persons whatsoever united or to be united in 
5 



q8 HOW LOMBARD STREET CAME TO EXIST, AND 

covenants or partnership exceeding the number of 
six persons in that part of Great Britain called 
England, to borrow, owe, or take up any sum or 
sums of money on their bills or notes payable on 
demand or at any less time than six months from 
the borrowing thereof during the continuance of 
such said privilege to the said governor and com- 
pany, who are hereby declared to be and remain a 
corporation with the privilege of exclusive bank- 
ing, as before recited/ To our modern ears these 
words seem to mean more than they did. The 
term banking was then applied only to the issue of 
notes and the taking up of money on bills on 
demand. Our present system of deposit banking, 
in which no bills or promissory notes are issued, was 
not then known on a great scale, and was not 
called banking. But its effect was very important. 
It in time gave the Bank of England the monopoly 
of the note issue of the Metropolis. It had at 
that time no branches, and so it did not compete 
for the country circulation. But in the Metropolis, 
where it-did compete, it was completely victorious. 
No company but the Bank of England could issue 
notes, and unincorporated individuals gradually 
gave way, and ceased to do so. Up to 1844 
London private bankers might have issued notes 
if they pleased, but almost a hundred years ago they 



WHY IT ASSUMED ITS PRESENT FORM. 



99 



were forced out of the field. The Bank of Eng- 
land has so long had a practical monopoly of the 
circulation, that it is commonly believed always 
to have had a legal monopoly. 

And the practical effect of the clause went 
further : it was believed to make the Bank of 
England the only joint stock company that could 
receive deposits, as well as the only company that 
could issue notes. The gift of ' exclusive bank- 
ing ' to the Bank of England was read in its most 
natural modern sense : it was thought to prohibit 
any other banking company from carrying on our 
present system of banking. After joint stock 
banking was permitted in the country, people 
began to inquire why it should not exist in the 
Metropolis too ? And then it was seen that the 
words I have quoted only forbid the issue of 
negotiable instruments, and not the receiving of 
money when no such instrument is given. Upon 
this construction, the London and Westminster 
Bank and all our older joint stock banks were 
founded. But till they began, the Bank of Eng- 
land had among companies not only the exclusive 
privilege of note issue, but that of deposit banking 
too. It was in every sense the only banking com- 
pany in London. 

With so many advantages over all competitors, 



100 HOW LOMBARD STREET CAME TO EXIST, ETC. 

it is quite natural that the Bank of England should 
have far outstripped them all. Inevitably it 
became the bank in London ; all the other bankers 
grouped themselves round it, and lodged their 
reserve with it. Thus our #;z£-reserve system of 
banking was not deliberately founded upon definite 
reasons ; it was the gradual consequence of many 
singular events, and of an accumulation of legal 
privileges on a single bank which has now been 
altered, and which no one would now defend. 



101 



CHAPTER IV. 

THE POSITION OF THE CHANCELLOR OF THE 
EXCHEQUER IN THE MONEY MARKET. 

Nothing can be truer in theory than the economi 
cal principle that banking is a trade and only a 
trade, and nothing can be more surely established 
by a larger experience than that a Government 
which interferes with any trade injures that trade. 
The best thing undeniably that a Government can 
do with the Money Market is to let it take care of 
itself. 

But a Government can only carry out this 
principle universally if it observe one condition : it 
must keep its own money. The Government is 
necessarily at times possessed of large sums in 
cash. It is by far the richest corporation in the 
country ; its annual revenue payable in money far 
surpasses that of any other body or person. And 
if it begins to deposit this immense income as it 
accrues at any bank, at once it becomes interested 



102 THE POSITION OF THE CHANCELLOR OF 

in the welfare of that bank. It cannot pay the 
interest on its debt if that bank cannot produce the 
public deposits when that interest becomes due ; it 
cannot pay its salaries, and defray its miscellaneous 
expenses, if that bank fail at any time. A modern 
Government is like a very rich man with very 
great debts which he cannot well pay ; its credit 
is necessary to its prosperity, almost to its exist- 
ence, and if its banker fail when one of its debts 
becomes due its difficulty is intense. 

Another banker, it will be said, may take up the 
Government account. He may advance, as is so 
often done in other bank failures, what the Govern- 
ment needs for the moment in order to secure the 
Government account in future. But the imperfec- 
tion of this remedy is that it fails in the very worst 
case. In a panic, and at a general collapse of 
credit, no such banker will probably be found. 
The old banker who possesses the Government 
deposit cannot repay it, and no banker not having 
that deposit will, at a bad crisis, be able to find the 
5,000,000/. or 6,000,000/. which the quarter day of 
a Government such as ours requires. If a finance 
Minister, having entrusted his money to a bank, 
begins to act strictly, and say he will in all cases 
let the Money Market take care of itself, the reply 



THE EXCHEQUER IN THE MONEY MARKET. IQ 3 

is that in one case the Money Market will take 
•care of him too, and he will be insolvent. 

In the infancy of Banking it is probably much 
better that a Government should as a rule keep its 
own money. If there are not Banks in which 
it can place secure reliance, it should not 
seem to rely upon them. Still less should it give 
peculiar favour to any one, and by entrusting 
it with the Government account secure to it a 
mischievous supremacy above all other banks. 
The skill of a financier in such an age is to equalise 
the receipt of taxation, and the outgoing of expen- 
diture ; it should be a principal care with him to 
make sure that more should not be locked up at a 
particular moment in the Government coffers than 
is usually locked up there. If the amount of dead 
capital so buried in the Treasury does not at 
any time much exceed the common average, the 
evil so caused is inconsiderable : it is only 
the loss of interest on a certain sum of money, 
which would not be much of a burden on the 
whole nation ; the additional taxation it would 
cause would be inconsiderable. Such an evil is 
nothing in comparison with that of losing the 
money necessary for inevitable expence by entrust- 
ing it to a bad Bank, or that of recovering this 
money by identifying the national credit with the 



104 THE POSITION OF THE CHANCELLOR OF 

bad Bank and so propping it up and perpetuating 
it. So long as the security of the Money Market is* 
not entirely to be relied on, the Government of a 
country had much better leave it to itself and keep 
its own money. If the banks are bad, they will 
certainly continue bad and will probably become 
worse if the Government sustains and encourages 
them. The cardinal maxim is, that any aid to a 
present bad Bank is the surest mode of prevent- 
ing the establishment of a future good Bank. 

When the trade of Banking began to be better 
understood, when the Banking system was 
thoroughly secure, the Government might begin 
to lend gradually ; especially to lend the unusual- 
ly large sums which even under the most equable 
system of finance will at times accumulate in 
the public exchequer. 

Under a natural system of banking it would 
have every facility. Where there were many banks 
keeping their own reserve, and each most anxious 
to keep a sufficient reserve, because its own life 
and credit depended on it, the risk of the Govern- 
ment in keeping a banker would be reduced to a 
minimum. It would have the choice of many 
bankers, and would not be restricted to any one. 

Its course would be very simple, and be 
analogous to that of other public bodies in the 



THE EXCHEQUER IN THE MONEY MARKET. IC >5 

country. The Metropolitan Board of Works, 
which collects a great revenue in London, has an 
account at the London and Westminster Bank, 
for which that bank makes a deposit of Consols 
as a security. The Chancellor of the Exchequer 
would have no difficulty in getting such security 
either. If, as is likely, his account would be 
thought to be larger than any single bank ought 
to be entrusted with, the public deposits might 
be divided between several. Each would give 
security, and the whole public money would be 
safe. If at any time the floating money in the 
hands of Government were exceptionally large, 
he might require augmented security to be lodged, 
and he might obtain an interest. He would be a 
lender of such magnitude and so much influence, 
that he might command his own terms. He 
might get his account kept safe if anyone could. 

If, on the other hand, the Chancellor of the 
Exchequer were a borrower, as at times he is, he 
would have every facility in obtaining what he 
wanted. The credit of the English Government 
is so good that he could borrow better than any- 
one else in the world. He would have greater 
facility, indeed, than now, for, except with the 
leave of Parliament, the Chancellor of the Ex- 
chequer cannot borrow by our present laws in the 



10 6 THE POSITION OF THE CHANCELLOR OF 

open market. He can only borrow from the 
Bank of England on what are called f deficiency 
bills.' In a natural system, he would borrow of 
any one out of many competing banks, selecting 
the one that would lend cheapest ; but under our 
present artificial system, he is confined to a single 
bank, which can fix its own charge. 

If contrary to expectation a collapse occurred, 
the Government might withdraw, as the American 
Government actually has withdrawn, its balance 
from the bankers. It might give its aid, lend Ex- 
chequer bills, or otherwise pledge its credit for 
the moment, but when the exigency was passed 
it might let the offending banks suffer. There 
would be a penalty for their misconduct. New 
and better banks, who might take warning from 
that misconduct, would arise. As in all natural 
trades, what is old and rotten would perish, what 
is new and good would replace it. And till the 
new banks had proved, by good conduct, their 
fitness for State confidence, the State need not 
give it. The Government could use its favour as 
a bounty on prudence, and the withdrawal of that 
favour as a punishment for culpable folly. 

Under a good system of banking, a great 
collapse, except from rebellion or invasion, would 
probably not happen. A large number of banks, 



THE EXCHEQUER IN THE MONEY MARKET. i0 y 

each feeling that their credit was at stake in keep- 
ing a good reserve, probably would keep one ; if 
any one did not, it would be criticised constantly, 
and would soon lose its standing, and in the end 
disappear. And such banks would meet an in- 
cipient panic freely, and generously ; they would 
advance out of their reserve boldly and largely, 
for each individual bank would fear suspicion, and 
know that at such periods it must ' show strength/ 
if at such times it wishes to be thought to have 
strength. Such a system reduces to a minimum 
the risk that is caused by the deposit. If the 
national money can safely be deposited in banks 
in any way, this is the way to make it safe. 

But this system is nearly the opposite to that 
which the law and circumstances have created for 
us in England. The English Government, far 
from keeping cash from the money market till 
the position of that market was reasonably secure, 
at a very early moment, and while credit of all 
kinds was most insecure, for its own interests 
entered into the Money Market. In order to 
effect loans better, it gave the custody and profit of 
its own money (along with other privileges) to a 
single bank, and therefore practically and in fact 
it is identified with the Bank to this hour. It can- 
not let the money market take care of itself because 



!08 THE POSITION OF THE CHANCELLOR OF 

it has deposited much money in that market, and 
it cannot pay its way if it loses that money. 

Nor would any English statesman propose to 
'wind up' the Bank of England. A theorist 
might put such a suggestion on paper, but no 
responsible government would think of it. At 
the worst crisis and in the worst misconduct of 
the Bank, no such plea has been thought of: in 
1825 when its till was empty, in 1837 when it 
had to ask aid from the Bank of France, no such 
idea was suggested. By irresistible tradition the 
English Government was obliged to deposit its 
money in the money market and to deposit with 
this particular Bank. 

And this system has plain and grave evils. 

1st. Because being created by state aid, it is 
more likely than a natural system to require 
state help. 

2ndly. Because, being a ^^^-reserve system, it 
reduces the spare cash of the Money Market to a 
smaller amount than any other system, and so 
makes that market more delicate. There being a 
less hoard to meet liabilities, any error in the 
management of that reserve has a proportionately 
greater effect. 

3rdly. Because, our one reserve is, by the ne- 
cessity of its nature, given over to one board of 



THE EXCHEQUER IN THE MONEY MARKET. I0 9 

directors, and we are therefore dependent on the 
wisdom of that one only, and cannot, as in most 
trades, strike an average of the wisdom and the 
folly, the discretion and the indiscretion, of many 
competitors. 

Lastly. Because that board of directors is, like 
every other board, pressed on by its shareholders 
to make a high dividend, and therefore to keep a 
small reserve, whereas the public interest imper- 
atively requires that they shall keep a larg t e one. 

These four evils were inseparable from the 
system, but there is besides an additional and 
accidental evil. The English Government not 
only created this singular system, but it pro- 
ceeded to impair it, and demoralise all the 
public opinion respecting it. For more than a 
century after its creation (notwithstanding occa- 
sional errors) the Bank of England, in the main, 
acted with judgment and with caution. Its busi- 
ness was but small as we should now reckon, but 
for the most part it conducted that business with 
prudence and discretion. In 1696, it had been 
involved in the most serious difficulties, and had 
been obliged to refuse to pay some of its notes. 
For a long period it was in wholesome dread of 
public opinion, and the necessity of retaining pub- 
lic confidence made it cautious. But the English 



IIO THE POSITION OF THE CHANCELLOR OF 

Government removed that necessity. In 1797, 
Mr. Pitt feared that he might not be able to 
obtain sufficient specie for foreign payments, in 
consequence of the low state of the Bank re- 
serve, and he therefore required the Bank not 
to pay in cash. He removed the preservative 
apprehension which is the best security of all 
Banks. 

For this reason the period under which the 
Bank of England did not pay gold for its notes 
■ — the period from 1797 to 18 19 — is always called 
the period of the Bank restriction. As the Bank 
during that period did not perform,, and was not 
compelled by law r to perform, its contract of 
paying its notes in cash, it might apparently have 
been well called the period of Bank license. But 
the word ' restriction ' was quite right, and was 
the only proper word as a description of the policy 
of 1797. Mr. Pitt did not say that the Bank of 
England need not pay its notes in specie ; he 
1 restricted ' them from doing so ; he said that 
they must not. 

In consequence, from 1797 to 1844 (when a 
new era begins), there never was a proper caution 
on the part of the Bank directors. At heart they 
considered that the Bank of England had a kind 
of charmed life, and that it was above the ordinary 



THE EXCHEQUER IN THE MONEY MARKET, m 

banking anxiety to pay its way. And this feeling* 
was very natural. ( A bank of issue, which need 
not pay its notes in cash, has a charmed life ; it 
can lend what it wishes, and issue what it likes, 
with no fear of harm to itself, and with no 
substantial check but its own inclination. For 
nearly a quarter of a century, the Bank of 
England was such a bank, for all that time it 
could not be in any danger. And naturally the 
public mind was demoralised also. Since 1797, 
the public have always expected the Government 
to help the Bank if necessary. I cannot fully 
discuss the suspensions of the Act of 1844 in 
1847, 1857, and 1866; but indisputably one of 
their effects is to make people think that Govern- 
ment will always help the Bank if the Bank is in 
extremity. And this is the sort of anticipation 
which tends to justify itself, and to cause what it 
expects. 

On the whole, therefore, the position of the 
Chancellor of the Exchequer in our Money 
Market is that of one who deposits largely in it, 
who created it, and who demoralised it. He 
cannot, therefore, banish it from his thoughts, 
or decline responsibility for it. He must arrange 
his finances so as not to intensify panics, but to 
mitigate them. He must aid the Bank of England 



II2 THE CHANCELLOR IN THE MONEY AIARICET. 

in the discharge of its duties ; he must not impede 
or prevent it. 

His aid may be most efficient. He is, on 
finance, the natural exponent of the public opinion 
of England. And it is by that opinion that we 
wish the Bank of England to be guided. Under 
a natural system of banking we should have 
relied on self-interest, but the State prevented 
that ; we now rely on opinion instead ; the public 
approval is a reward, its disapproval a severe 
penalty, on the Bank directors ; and of these it is 
most important that the finance minister should 
be a sound and felicitous exponent. 



n3 



CHAPTER V. 

THE MODE IN WHICH THE VALUE OF MONEY IS 
SETTLED IN LOMBARD STREET. 

Many persons believe that the Bank of England 
has some peculiar power of fixing the value of 
money. They see that the Bank of England 
varies its minimum rate of discount from time to 
time, and that, more or less, all other banks follow 
its lead, and charge much as it charges ; and they 
are puzzled why this should be. ' Money/ as 
economists teach, ' is a commodity, and only a 
commodity ; ' why then, it is asked, is its value 
fixed in so odd a way, and not the way in which 
the value of all other commodities is fixed ? 

There is at bottom, however, no difficulty in the 
matter. The value of money is settled, like 
that of all other commodities, by supply and de- 
mand, and only the form is essentially different. 
In other commodities all the large dealers fix their 
own price ; they try to underbid one another, and 



X14 THE MODE IN WHICH THE VALUE OF 

that keeps down the price; they try to get as 
much as they can out of the buyer, and that keeps 
up the price. Between the two what Adam Smith 
calls the higgling of the market settles it. And 
this is the most simple and natural mode of doing 
business, but it is not the only mode. If circum- 
stances make it convenient another may be 
adopted. A single large holder — especially if he 
be by far the greatest holder — may fix his price, 
and other dealers may say whether or not they 
will undersell him, or whether or not they will ask 
more than he does. A very considerable holder 
of an article may, for a time, vitally affect its value 
if he lay down the minimum price which he will 
take, and obstinately adhere to it. This is 
the way in which the value of money in Lombard 
Street is settled. The Bank of England used to 
be a predominant, and is still a most important, 
dealer in money. It lays down the least price at 
which alone it will dispose of its stock, and this, 
for the most part, enables other dealers to obtain 
that price, or something near it. 

The reason is obvious. At all ordinary mo- 
ments there is not money enough in Lombard 
Street to discount all the bills in Lombard Street 
without taking some money from the Bank of 
England. As soon as the Bank rate is fixed, a 



MONEY IS SETTLED IN LOMBARD STREET, n$ 

great many persons who have bills to discount try 
how much cheaper than the Bank they can get 
these bills discounted. But they seldom can get 
them discounted very much cheaper, for if they did 
everyone would leave the Bank, and the outer 
market would have more bills than it could bear. 

In practice, when the Bank finds this process 
beginning, and sees that its business is much 
diminishing, it lowers the rate, so as to secure a 
reasonable portion of the business to itself, and 
to keep a fair part of its deposits employed. At 
Dutch auctions an upset or maximum price used 
to be fixed by the seller, and he came down in his 
bidding till he found a buyer. The value of 
money is fixed in Lombard Street in much the 
same way, only that the upset price is not that of 
all sellers, but that of one very important seller, 
some part of whose supply is essential. 

The notion that the Bank of England has a 
control over the Money Market, and can fix the 
rate of discount as it likes, has survived from the 
old days before 1844, when the Bank could issue 
as many notes as it liked. But even then the 
notion was a mistake. A bank with a monopoly 
of note issue has great sudden power in the 
Money Market, but no permanent power : it can 
affect the rate of discount at any particular mo- 



H6 THE MODE IN WHICH THE VALUE OF 

ment, but it cannot affect the average rate. And 
the reason is, that any momentary fall in money, 
caused by the caprice of such a bank, of itself 
tends to create an immediate and equal rise, so 
that upon an average the value is not altered. 

What happens is this. If a bank with a mo- 
nopoly of note issue suddenly lends (suppose) 
2,000,000/. more than usual, it causes a propor- 
tionate increase of trade and increase of prices. 
The persons to whom that 2,000,000/. was lent, did 
not borrow it to lock it up ; they borrow it, in 
the language of the market, to ' operate with ' — 
that is, they try to buy with it ; and that new 
attempt to buy — that new demand raises prices. 
And this rise of prices has three consequences. 
First. It makes everybody else want to borrow 
money. Money is not so efficient in buying as 
it was, and therefore operators require more 
money for the same dealings. If railway stock 
is 10 per cent, dearer this year than last, a 
speculator who borrows money to enable him to 
deal must borrow 10 per cent, more this year than 
last, and in consequence there is an augmented 
demand for loans. Secondly. This is an effectual 
demand, for the increased price of railway stock 
enables those who wish it to borrow more upon 
it. The common practice is to lend a certain 



MONEY IS SETTLED IN LOMBARD STREET. 



117 



portion of the market value of such securities, and 
if that value increases, the amount of the usual 
loan to be obtained on them increases too. In 
this way, therefore, any artificial reduction in the 
value of money causes a new augmentation of the 
demand for money, and thus restores that value 
to its natural level. In all business this is well 
known by experience : a stimulated market soon 
becomes a tight market, for so sanguine are enter- 
prising men, that as soon as they get any unusual 
ease they always fancy that the relaxation is 
greater than it is, and speculate till they want 
more than they can obtain. 

In these two ways sudden loans by an issuer of 
notes, though they may temporarily lower the 
value of money, do not lower it permanently, 
because they generate their own counteraction. 
And this they do whether the notes issued are 
convertible into coin or not. During the period 
of Bank restriction, from 1797 to 1819, the Bank 
of England could not absolutely control the Money 
Market, any more than it could after 18 19, when 
it was compelled to pay its notes in coin. But in 
the case of convertible notes there is a third effect, 
which works in the same direction, and works 
more quickly. A rise of prices, confined to one 
country, tends to increase imports, because other 



TI 8 THE MODE IN WHICH THE VALUE OF 

countries can obtain more for their goods if they 
send them there, and it discourages exports, 
because a merchant who would have gained a 
profit before the rise by buying here to sell again 
will not gain so much, if any, profit after that rise. 
By this augmentation of imports the indebtedness 
of this country is augmented, and by this diminu- 
tion of exports the proportion of that indebtedness 
which is paid in the usual way is decreased also. 
In consequence, there is a larger balance to be 
paid in bullion ; the store in the bank or banks 
keeping the reserve is diminished, and the rate of 
interest must be raised by them to stay the efflux. 
And the tightness so produced is often greater 
than, and always equal to, the preceding unnatural 
laxity. 

There is, therefore, no ground for believing, as 
is so common, that the value of money is settled 
by different causes than those which affect the 
value of other commodities, or that the Bank of 
England has any despotism in that matter. It 
has the power of a large holder of money, and 
no more. Even formerly, when its monetary 
powers were greater and its rivals weaker, it had 
no absolute control. It was simply a large cor- 
porate dealer, making bids and much influencing 



MONEY IS SETTLED IN LOMBARD STREET, 



119 



— though in no sense compelling- — other dealers 
thereby. 

But though the value of money is not settled 
in an exceptional way, there is nevertheless a 
peculiarity about it, as there is about many 
articles. It is a commodity subject to great fluct- 
uations of value, and those fluctuations are easily 
produced by a slight excess or a slight deficiency 
of quantity. Up to a certain point money is a 
necessity. If a merchant has acceptances to 
meet to-morrow, money he must and will find to- 
day at some price or other. And it is this urgent 
need of the whole body of merchants which 
runs up the value of money so wildly and to such 
a height in a great panic. On the other hand, 
money easily becomes a 'drug/ as the phrase is, 
and there is soon too much of it. The number 
of accepted securities is limited, and cannot be 
rapidly increased ; if the amount of money seek- 
ing these accepted securities is more than can be 
lent on them the value of money soon goes 
down. You may often hear in the market that 
bills are not to be had, — meaning good bills of 
course, — and when you hear this you may be 
sure that the value of money is very low. 

If money w r ere all held by the owners of it, or 



120 THE MODE IN WHICH THE VALUE OF 

by banks which did not pay an interest for it, 
the value of money might not fall so fast. Money 
would, in the market phrase, be c well held/ The 
possessors would be under no necessity to employ 
it all ; they might employ part at a high rate 
rather than all at a low rate. But in Lombard 
Street money is very largely held by those who 
do pay an interest for it, and such persons must 
employ it all, or almost all, for they have much 
to pay out with one hand, and unless they receive 
much with the other they will be ruined. Such 
persons do not so much care what is the rate of 
interest at which they employ their money : they 
can reduce the interest they pay in proportion 
to that which they can make. The vital point to 
them is to employ it at some rate. If you hold 
(as in Lombard Street some persons do) millions 
of other people's money at interest, arithmetic 
teaches that you will soon be ruined if you make 
nothing of it even if the interest you pay is not 
high. 

The fluctuations in the value of money are 
therefore greater than those on the value of most 
other commodities. At times there is an exces- 
sive pressure to borrow it, and at times an exces- 
sive pressure to lend it, and so the price is forced 
up and down. 



MONEY IS SETTLED IN LOMBARD STREET. I2 i 

These considerations enable us to estimate the 
responsibility which is thrown on the Bank of 
England by our system, and by every system on 
the bank or banks who by it keep the reserve of 
bullion or of legal tender exchangeable for bul- 
lion. These banks can in no degree control the 
permanent value of money, but they can com- 
pletely control its momentary value. They can- 
not change the average value, but they can deter- 
mine the deviations from the average. If the dom- 
inant banks manage ill, the rate of interest will at 
one time be excessively high, and at another time 
excessively low : there will be first a pernicious 
excitement, and next a fatal collapse. But if they 
manage well, the rate of interest will not deviate 
so much from the average rate ; it will neither 
ascend so high nor descend so low. As far as 
anything can be steady the value of money will 
then be steady, and probably in consequence trade 
will be steady too — at least a principal cause of 
periodical disturbance will have been withdrawn 
from it. 



122 WHY LOMBARD STREET IS OFTEN DULL^ 



CHAPTER VI. 

WHY LOMBARD STREET IS OFTEN VERY DULL, 
AND SOMETIMES EXTREMELY EXCITED. 

Any sudden event which creates a great demand 
for actual cash may cause, and will tend to cause, 
a panic in a country where cash is much econ- 
omised, and where debts payable on demand are 
large. In such a country an immense credit 
rests on a small cash reserve, and an unexpected 
and large diminution of that reserve may easily 
break up and shatter very much, if not the whole, 
of that credit. Such accidental events are of the 
most various nature : a bad harvest, an apprehen- 
sion of' foreign invasion, the sudden failure of a 
great firm which everybody trusted, and many 
other similar events, have all caused a sudden 
demand for cash. And some writers have en- 
deavoured to classify panics according to the nature 
of the particular accidents producing them. But 
little, however, is, I believe, to be gained by such 



AND SOMETIMES EXCITED, j 2 ^ 

classifications. There is little difference in the 
effect of one accident and another upon our credit 
system. We must be prepared for all of them, 
and we must prepare for all of them in the same 
way — by keeping a large cash reserve. 

But it is of great importance to point out that 
our industrial organisation is liable not only to 
irregular external accidents, but likewise to regular 
internal changes ; that these changes make our 
credit system much more delicate at some times 
than at others ; and that it is the recurrence 
of these periodical seasons of delicacy which has 
given rise to the notion that panics come accord- 
ing to a fixed rule, — that every ten years or so we 
must have one of them. 

Most persons who begin to think of the subject 
are puzzled on the threshold. They hear much 
of * good times ' and ' bad times/ meaning by 
* good ' times in which nearly everyone is very well 
off, and by ' bad ' times in which nearly everyone 
is comparatively ill off. And at first it is natural 
to ask why should everybody, or almost every- 
body, be well off together ? Why should there 
be any great tides of industry, with large diffused 
profit by way of flow, and large diffused want of 
profit, or loss, by way of ebb ? The main answer 
is hardly given distinctly in our common books of 



124 WHY LOMBARD STREET IS OFTEN DULL, 

political economy. These books do not tell you 
what is the fund out of which large general profits 
are paid in good times, nor do they explain why 
that fund is not available for the same purpose in 
bad times. 

Our current political economy does not suffi- 
ciently take account of time as an element in trade 
operations ; but as soon as the division of labour 
has once established itself in a community, two 
principles at once begin to be important, of which 
time is the very essence. These are — 

First. That as goods are produced to be ex- 
changed, it is good that they should be exchanged 
as quickly as possible. 

Secondly. That as every producer is mainly 
occupied in producing what others want, and not 
what he wants himself, it is desirable that he 
should always be able to find, without effort, 
without delay, and without uncertainty, others 
who want what he can produce. 

In themselves these principles are self-evident. 
Everyone will admit it to be expedient that all 
goods wanting to be sold should be sold as soon 
as they are ready ; that every man who wants to 
•work should find employment as soon as he is 
ready for it. Obviously also, as soon as the 
' division of labour ' is really established, there is 



AND SOMETIMES EXCITED. 



125 



a difficulty about both of these principles. A 
produces what he thinks B wants, but it may be 
a mistake, and B may not want it. A may be 
able and willing to produce what B wants, but he 
may not be able to find B — he may not know of 
his existence. 

The general truth of these principles is obvious, 
but what is not obvious is the extreme greatness 
of their effects. Taken together, they make the 
whole difference between times of brisk trade and 
great prosperity, and times of stagnant trade and 
great adversity, so far as that prosperity and that 
adversity are real and not illusory. If they are 
satisfied, everyone knows whom to work for, and 
what to make, and he can get immediately in 
exchange what he wants himself. There is no 
idle labour and no sluggish capital in the whole 
community, and, in consequence, all which can 
be produced is produced, the effectiveness of 
human industry is augmented, and both kinds 
of producers — both capitalists and labourers — are 
much richer than usual, because the amount to 
be divided between them is also much greater 
than usual. 

And there is a partnership in industries. No 
single large industry can be depressed without 
injury to other industries ; still less can any great 



126 WHY LOMBARD STREET IS OFTEN DULL, 

group of industries. Each industry when pros- 
perous buys and consumes the produce probably 
of most (certainly of very many) other industries, 
and if industry A fail and is in difficulty, industries 
B, and C, and D, which used to sell to it, will 
not be able to sell that which they had produced 
in reliance on A's demand, and in future they will 
stand idle till industry A recovers, because in 
default of A there will be no one to buy the com- 
modities which they create. Then as industry B 
buys of C, D, &c, the adversity of B tells on C, 
D, &c, and as these buy of E, F, &c, the effect is 
propagated through the whole alphabet. And in 
a certain sense it rebounds. Z feels the want 
caused by the diminished custom of A, B, & C, and 
so it does not earn so much ; in consequence, it 
cannot lay out as much on the produce of A, B, & C, 
and so these do not earn as much either. In all 
this money is but an instrument. The same thing 
would happen equally well in a trade of barter, 
if a state of barter on a very large scale were not 
practically impossible, on account of the time and 
trouble which it would necessarily require. As 
has been explained, the fundamental cause is that 
under a system in which everyone is dependent 
on the labour of everyone else, the loss of one 
spreads and multiplies through all, and spreads 



AND SOMETIMES EXCITED. 



127 



and multiplies the faster the higher the previous 
perfection of the system of divided labour, and 
the more nice and effectual the mode of inter- 
change. And the entire effect of a depression 
in any single large trade requires a considerable 
time before it can be produced. It has to be 
propagated, and to be returned through a variety 
of industries, before it is complete. Short depres- 
sions, inconsequence, have scarcely any discernible 
consequences ; they are over before we think of 
their effects. It is only in the case of continuous 
and considerable depressions that the cause is in 
action long enough to produce discernible effects. 
The most common, and by far the most impor- 
tant, case where the depression in one trade causes 
depression in all others, is that of depressed 
agriculture. When the agriculture of the world 
is ill off, food is dear. And as the amount of 
absolute necessaries which a people consumes 
cannot be much diminished, the additional amount 
which has to be spent on them is so much sub- 
tracted from what used to be spent on other 
things. All the industries, A, B, C, D, up to Z, 
are somewhat affected by an augmentation in the 
price of corn, and the most affected are the large 
ones, which produce the objects in ordinary times 
most consumed by the working classes. The 



I2 8 WHY LOMBARD STREET IS OFTEN DULL, 

clothing trades feel the difference at once, and in 
this country the liquor trade (a great source of 
English revenue) feels it almost equally soon. 
Especially when for two or three years harvests 
have been bad, and corn has long been dear, 
every industry is impoverished, and almost every 
one, by becoming poorer, makes every other 
poorer too. All trades are slack from diminished 
custom, and the consequence is a vast stagnant 
capital, much idle labour, and a greatly retarded 
production. 

It takes two or three years to produce this full 
calamity, and the recovery from it takes two or 
three years also. If corn should long be cheap, 
the labouring classes have much to spend on 
what they like besides. The producers of those 
things become prosperous, and have a greater pur- 
chasing power. They exercise it, and that creates 
in the class they deal with another purchasing 
power, and so all through society. The whole 
machine of industry is stimulated to its maximum 
of energy, just as before much of it was slackened 
almost to its minimum. 

A great calamity to any great industry will 
tend to produce the same effect, but the fortunes 
of the industries on which the wages of labour are 
expended are much more important than those of 



AND SOMETIMES EXCITED. 



129 



all others, because they act much more quickly 
upon a larger mass of purchasers. On principle, 
if there was a perfect division of labour, every 
industry would have to be perfectly prosperous in 
order that any one might be so. So far, there- 
fore, from its being at all natural that trade should 
develop constantly, steadily, and equably, it is 
plain, without going farther, from theory as well 
as from experience, that there are inevitably peri- 
ods of rapid dilatation, and as inevitably periods 
of contraction and of stagnation. 

Nor is this the only changeable element in 
modern industrial societies. Credit — the disposi- 
tion of one man to trust another — is singularly 
varying. In England, after a great calamity, 
everybody is suspicious of everybody ; as soon as 
that calamity is forgotten, everybody again con- 
fides in everybody. On the Continent there has 
been a stiff controversy as to whether credit should 
or should not be called ' capital : ' in England, 
even the little attention once paid to abstract 
economics is now diverted, and no one cares in 
the least for refined questions of this kind : the 
material practical point is that, in M. Chevalier's 
language, credit is ' additive/ or additional — that 
is, in times when credit is good productive 
power is more efficient, and in times when 

6* 



130 WHY LOMBARD STREET IS OFTEN DULL, 

credit is bad productive power is less efficient. 
And the state of credit is thus influential, because 
of the two principles which have just been ex- 
plained. In a good state of credit, goods lie on 
hand a much less time than when credit is bad ; 
sales are quicker ; intermediate dealers borrow 
easily to augment their trade, and so more and 
more goods are more quickly and more easily 
transmitted from the producer to the consumer. 

These two variable causes are causes of real 
prosperity. They augment trade and production, 
and so are plainly beneficial, except where by 
mistake the wrong things are produced, or where 
also by mistake misplaced credit is given, and a 
man who cannot produce anything which is 
wanted gets the produce of other people's labour 
upon a false idea that he will produce it. But 
there is another variable cause which produces far 
more of apparent than of real prosperity and of 
which the effect is in actual life mostly confused 
with those of the others. 

In our common speculations we do not enough 
remember that interest on money is a refined 
idea, and not a universal one. So far indeed 
is it from being universal, that the majority 
of saving persons in most countries would 
reject it. Most savings in most countries 



AND SOMETIMES EXCITED. 



131 



are held in hoarded specie. In Asia, in 
Africa, in South America, largely even in 
Europe, they are thus held, and it would frighten 
most of the owners to let them out of their keep- 
ing. An Englishman — a modern Englishman at 
least — assumes as a first principle that he ought 
to be able to ' put his money into something safe 
that will yield 5 per cent. ; ' but most saving persons 
in most countries are afraid to ' put their money ' 
into anything, Nothing is safe to their minds ; 
indeed, in most countries, owing to a bad Govern- 
ment and a backward industry, no investment, or 
hardly any, really is safe. In most countries 
most men are content to forego interest ; but 
in more advanced countries, at some times there 
are more savings seeking investment than 
there are known investments for ; at other times 
there is no such superabundance. Lord Ma- 
caulay has graphically described one of the 
periods of excess. He says — ' During the 
interval between the Restoration and the Revolu- 
tion the riches of the nation had been rapidly 
increasing. Thousands of busy men found every 
Christmas that, after the expenses of the year's 
housekeeping had been defrayed out of the year's 
income, a surplus remained ; and how that surplus 
was to be employed was a question of some 



l^ 2 WHY LOMBARD STREET IS OFTEN DULL, 

difficulty. In our time, to invest such a surplus, 
at something more than three per cent., on the 
best security that has ever been known in the 
world, is the work of a few minutes. But in the 
seventeenth century, a lawyer, a physician, a 
retired merchant, who had saved some thousands, 
and who wished to place them safely and profit- 
ably, was often greatly embarrassed. Three 
generations earlier, a man who had accumulated 
wealth in a profession generally purchased real 
property, or lent his savings on mortgage. But 
the number of acres in the kingdom had remained 
the same ; and the value of those acres, though it 
had greatly increased, had by no means increased 
so fast as the quantity of capital which was seek- 
ing for employment. Many too wished to put 
their money where they could find it at an hour's 
notice, and looked about for some species of 
property which could be more readily transferred 
than a house or a field. A capitalist might lend 
on bottomry or on personal security ; but, if he 
did so, he ran a great risk of losing interest and 
principal. There were a few joint stock com- 
panies, among which the East India Company 
held the foremost place ; but the demand for the 
stock of such companies was far greater than the 
supply. Indeed the cry for a new East India 



AND SOMETIMES EXCITED. 



133 



Company was chiefly raised by persons who had 
found difficulty in placing their savings at interest 
on good security. So great was that difficulty 
that the practice of hoarding was common. We 
are told that the father of Pope, the poet, who 
retired from business in the City about the time 
of the Revolution, carried to a retreat in the 
country a strong box containing near twenty 
thousand pounds, and took out from time to time 
what was required for household expenses ; and 
it is highly probable that this was not a solitary 
case. At present the quantity of coin which is 
hoarded by private persons is so small, that it 
would, if brought forth, make no perceptible 
addition to the circulation. But, in the earlier 
part of the reign of William the Third, all the 
greatest writers on currency were of opinion that 
a very considerable mass of gold and silver was 
hidden in secret drawers and behind wainscots. 

1 The natural effect of this state of things was 
that a crowd of projectors, ingenious and absurd, 
honest and knavish, employed themselves in de- 
vising new schemes for the employment of 
redundant capital. It was about the year 1688 
that the word stockjobber was first heard in 
London. In the short space of four years a 
crowd of companies, every one of which confi- 



!34 WHY LOMBARD STREET IS OFTEN DULL, 

dently held out to subscribers the hope of immense 
gains, sprang into existence — the Insurance Com- 
pany, the Paper Company, the Lutestring Com- 
pany, the Pearl Fishery Company, the Glass 
Bottle Company, the Alum Company, the Blythe 
Coal Company, the Swordblade Company. There 
was a Tapestry Company, which would soon 
furnish pretty hangings for all the parlours of 
the middle class, and for all the bedchambers 
of the higher. There was a Copper Company, 
which proposed to explore the mines of England, 
and held out a hope that they would prove not 
less valuable than those of Potosi. There was a 
Diving Company which undertook to bring up 
precious effects from shipwrecked vessels, and 
which announced that it had laid in a stock of 
wonderful machines resembling complete suits of 
armour. In front of the helmet was a huge glass 
eye like that of a Cyclops ; and out of the crest 
went a pipe through which the air was to be ad- 
mitted. The whole process was exhibited on the 
Thames. Fine gentlemen and fine ladies were 
invited to the show, were hospitably regaled, and 
were delighted by seeing the divers in their 
panoply descend into the river and return laden 
with old iron and ship's tackle. There was a 
Greenland Fishing Company, which could not fail 



AND SOMETIMES EXCITED. 



135 



to drive the Dutch whalers and herring busses 
out of the Northern Ocean. There was a Tan- 
ning Company, which promised to furnish leather 
superior to the best that was brought from 
Turkey or Russia. There was a society which 
undertook the office of giving gentlemen a liberal 
education on low terms, and which assumed the 
sounding name of the Royal Academies Company. 
In a pompous advertisement it was announced 
that the directors of the Royal Academies Com- 
pany had engaged the best masters in every 
branch of knowledge, and were about to issue 
twenty thousand tickets at twenty shillings each. 
There was to be a lottery — two thousand prizes 
were to be drawn ; and the fortunate holders of 
the prizes were to be taught, at the charge of the 
Company, Latin, Greek, Hebrew, French, Spanish^ 
conic sections, trigonometry, heraldry, japaning, 
fortification, bookkeeping, and the art of playing 
the theorbo/ 

The panic was forgotten till Lord Macaulay 
revived the memory of it. But, in fact, in the South 
Sea Bubble, which has always been remembered, 
the form was the same, only a little more extrava- 
gant ; the companies in that mania were for objects 
snch as these : — ' " Wrecks to be fished for on the 
Irish Coast — Insurance of Horses and other Cattle 



I36 WHY LOMBARD STREET IS OFTEN DULL, 

(two millions) — Insurance of Losses by Servants— 
To make Salt Water Fresh — For building of 
Hospitals for Bastard Children — For building of 
Ships against Pirates — For making of Oil from 
Sun-flower Seeds — For improving of Malt Liquors 
— For recovery of Seamen's Wages — For extract- 
ing of Silver from Lead — For the transmuting of 
Quicksilver into a malleable and fine Metal — For 
making of Iron with Pit-coal — For importing a 
Number of large Jack Asses from Spain- -For 
trading in Human Hair — For fatting of Hogs — 
For a Wheel of Perpetual Motion." But the 
most strange of all, perhaps, was " For an Under- 
taking which shall in due time be revealed." 
Each subscriber was to pay down two guineas, 
and hereafter to receive a share of one hundred, 
with a disclosure of the object ; and so tempting 
was the offer, that 1,000 of these subscriptions 
were paid the same morning, with which the pro- 
jector went off in the afternoon/ In 1825 there 
were speculations in companies nearly as wild, 
and just before 1866 there were some of a like 
nature, though not equally extravagant. The 
fact is, that the owners of savings not finding, 
in adequate quantities, their usual kind of in- 
vestments, rush into anything that promises spe- 
ciously, and when they find that these specious 



AND SOMETIMES EXCITED. 



137 



investments can be disposed of at a high profit, 
they rush into them more and more. The first 
taste is for high interest, but that taste soon be- 
comes secondary. There is a second appetite for 
large gains to be made by selling the principal 
which is to yield the interest. So long as such 
sales can be effected the mania continues ; when 
it ceases to be possible to effect them, ruin begins. 
So long as the savings remain in possession 
of their owners, these hazardous gamblings in 
speculative undertakings are almost the whole 
effect of an excess of accumulation over tested 
investment. Little effect is produced on the 
general trade of the country. The owners of the 
savings are too scattered and far from the market 
to change the majority of mercantile transactions. 
But when these savings come to be lodged in the 
hands of bankers, a much wider result is produced. 
Bankers are close to mercantile life ; they are 
always ready to lend on good mercantile securi- 
ties ; they wish to lend on such securities a large 
part of the money entrusted to them. When, 
therefore, the money so entrusted is unusually 
large, and when it long continues so, the general 
trade of the country is, in the course of time, 
changed. Bankers are daily more and more 
ready to lend money to mercantile men ; more is 



!38 WHY LOMBARD STREET IS OFTEN DULL, 

lent to such men ; more bargains are made in 
consequence ; commodities are more sought after ; 
and, in consequence, prices rise more and more. 

The rise of prices is quickest in an improving 
state of credit. Prices in general are mostly 
determined by wholesale transactions. The retail 
dealer adds a percentage to the wholesale prices, 
not, of course, always the same percentage, but 
still mostly the same. Given the wholesale price 
of most articles, you can commonly tell their retail 
price. Now wholesale transactions are commonly 
not cash transactions, but bill transactions. The 
duration of the bill varies with the custom of the 
trade ; it may be two, three months, or six weeks, 
but there is always a bill. Times of credit mean 
times in which the bills of many people are taken 
readily ; times of bad credit, times when the bills 
of much fewer people are taken, and even of those 
suspiciously. In times of good credit there are a 
great number of strong purchasers, and in times 
of bad credit only a smaller number of weak 
ones ; and, therefore, years of improving credit, 
if there be no disturbing cause, are years of rising 
price, and years of decaying credit, years of falling 
price. 

This is the meaning of the saying ' John Bull 
can stand many things, but he cannot stand two 



AND SOMETIMES EXCITED. 



139 



per cent. : ' it means that the greatest effect of the 
three great causes is nearly peculiar to England ; 
here, and here almost alone, the excess of savings 
over investments is deposited in banks ; here, 
and here only, is it made use of so as to affect 
trade at large ; here, and here only, are prices 
gravely affected. In these circumstances, a low 
rate of interest, long protracted, is equivalent to a 
total depreciation of the precious metals. In his 
book on the effect of the great gold discoveries, 
Professor Jevons showed, and so far as I know, 
was the first to show, the necessity of eliminating 
these temporary changes of value in gold before 
you could judge properly of the permanent 
depreciation. He proved, that in the years pre- 
ceding both 1847 and 1857 there was a gen- 
eral rise of prices ; and in the years succeeding 
these years, a great fall. The same might be 
shown of the years before and after 1866, mutatis 
mutandis. 

And at the present moment we have a still 
more remarkable example, which was thus 
analysed in the Economist of the 30th December, 
1 87 1, in an article which I venture to quote as a 
whole : — 



!40 WHY LOMBARD STREET IS OFTEN DULL, 

4 THE GREAT RISE IN THE PRICE OF COMMODITIES. 

*■ Most persons are aware that the trade of the 
country is in a state of great activity. All the 
usual tests indicate that — the state of the Revenue, 
the Bankers' Clearing-house figures, the returns 
of exports and imports are all plain, and all speak 
the same language. But few have, we think, 
considered one most remarkable feature of the 
present time, or have sufficiently examined its 
consequences. That feature is the great rise in 
the price of most of the leading articles of trade 
during the past year. We give at the foot of this 
paper a list of articles, comprising most first-rate 
articles of commerce, and it will be seen that the 
rise of price, though not universal and not uniform, 
is nevertheless very striking and very general. 
The most remarkable cases are— 



January December 

£ s. d. £ s. d. 

Wool — South Down hogs per pack 13 00 21150 
Cotton — Upland ordinary per lb. 007^ o o 8| 

No. 40 mule yarn, &c. ,, o \ \\ o 1 2-J 

per ton 726 8 17 6 



Iron — Bars, British . 
Pig, No. 1 Clyde . 

Lead 

Tin 

Copper — Sheeting . 

Wheat (Gazette average) per qr. 2 12 o 2 15 8 



2 13 3 3 16 o 

18 7 6 19 2 6 

137 o o 157 o o 

75 10 o 95 o o 



AND SOMETIMES EXCITED. 14 j 

— and in other cases there is a tendency upwards 
in price much more often than there is a tendency 
downwards. 

' This general rise of price must be due either 
to a diminution in the supply of the quoted articles, 
or to an increased demand for them. In some 
cases there has no doubt been a short supply. 
Thus in wool, the diminution in the home breed 
of sheep has had a great effect on the price — 

In 1869 the home stock of sheep was . . . 29,538,000 
In 1871 „ „ „ • . . 27,133,000 

Diminution 2,405,000 

Equal to 8.1 per cent. 

— and in the case of some other articles there 
may be a similar cause operating. But taking 
the whole mass of the supply of commodities in 
this country, as shown by the plain test of the 
quantities imported, it has not diminished, but 
augmented. The returns of the Board of Trade 
prove this in the most striking manner, and we 
give below a table of some of the important 
articles. The rise in prices must, therefore, be 
due to an increased demand, and the first question 
is, to what is that demand due ? 

1 We believe it to be due to the combined 
operation of three causes — cheap money, cheap 
corn, and improved credit. As to the first indeed, 



142 WHY LOMBARD STREET IS OFTEN DULL, 

it might be said at first sight that so general 
an increase must be due to a depreciation of the 
precious metals. Certainly in many controversies 
facts far less striking have been alleged as proving 
it. And indeed there plainly is a diminution in 
the purchasing power of money, though that dimi- 
nution is not general and permanent, but local 
and temporary. The peculiarity of the precious 
metals is that their value depends for unusually 
long periods on the quantity of them which is in 
the market. In the long run, their value, like 
that of all others, is determined by the cost at 
which they can be brought to market. But for 
all temporary purposes, it is the supply in the 
market which governs the price, and that supply 
in this country is exceedingly variable. After a 
commercial crisis — 1866 for example — two things 
happen : first, we call in the debts which are 
owing to us in foreign countries ; and we require 
these debts to be paid to us, not in commodities, 
but in money. From this cause principally, and 
omitting minor causes, the bullion in the Bank of 
England, which was 13,156,000/. in May 1866, 
rose to 19,413,000/. in January 1867, being an 
increase of over 6,000,000/. And then there 
comes also a second cause, tending in the same 
direction. During a depressed period the savings 



AND SOMETIMES EXCITED. 



143 



of the country increase considerably faster than 
the outlet for them. A person who has made 
savings does not know what to do with them. 
And this new unemployed saving means addi- 
tional money. Till a saving is invested or 
employed it exists only in the form of money : a 
farmer who has sold his wheat and has ioo/. 'to 
the good/ holds that ioo/. in money, or some 
equivalent for money, till he sees some advan- 
tageous use to be made of it. Probably he places 
it in a bank, and this enables it to do more work. 
If 3,000,000/. of coin be deposited in a bank, and 
it need only keep 1,000,000/. as a reserve, that 
sets 2,000,000/. free, and is for the time equivalent 
to an increase of so much coin. As a principle 
it may be laid down that all new unemployed 
savings require either an increased stock of the 
precious metals, or an increase in the efficiency of 
the banking expedients by which these metals are 
economised. In other words, in a saving and 
uninvesting period of the national industry, we 
accumulate gold, and augment the efficiency of 
our gold. If therefore such a saving period 
follows close upon an occasion when foreign 
credits have been diminished and foreign debts 
called in, the augmentation in the effective 
quantity of gold in the country is extremely great. 



144 WHY LOMBARD STREET IS OFTEN DULL, 

The old money called in from abroad and the new 
money representing the new saving co-operate 
with one another. And their natural tendency 
is to cause a general rise in price, and what is the 
same thing, a diffused diminution in the purchas- 
ing power of money. 

' Up to this point there is nothing special in the 
recent history of the money market, Similar 
events happened both after the panic of 1847, an< 3 
after that of 1857. But there is another cause of 
the same kind, and acting in the same direction, 
which is peculiar to the present time ; this cause 
is the amount of the foreign money, and especially 
of the money of foreign Governments, now in 
London. No Government probably ever had 
nearly as much at its command as the German 
Government now has. Speaking broadly, two 
things happened : during the war England was 
the best place of shelter for foreign money, and 
this made money more cheap here than it would 
otherwise have been ; after the war England be- 
came the most convenient paying place, and the 
most convenient resting place for money, and this 
again has made money cheaper. The commercial 
causes, for which there are many precedents, have 
been aided by a political cause for the efficacy of 
which there is no precedent. 



AND SOMETIMES EXCITED. I4 g 

i But though plentiful money is necessary to 
high prices, and though it has a natural tendency 
to produce these prices, yet it is not of itself suffi- 
cient to produce them. In the cases we are 
dealing with, in order to lower prices there must 
not only be additional money, but a satisfactory 
mode of employing that additional money. This 
is obvious if we remember whence that aug- 
mented money is derived. It is derived from the 
savings of the people, and will only be invested in 
the manner which the holders for the time being 
consider suitable to such savings. It will not be 
used in mere expenditure ; it would be contrary 
to the very nature of it so to use it. A new 
channel of demand is required to take off the new 
money, or that new money will not raise prices. 
It will lie idle in the banks, as we have often seen 
it. We should still see the frequent, the common 
phenomenon of dull trade and cheap money exist- 
ing side by side. 

1 The demand in this case arose in the most 
effective of all ways. In 1867 and the first half 
of 1868 corn was dear, as the following figures 
show : — 



146 WHY LOMBARD STREET IS OFTEN DULL, 



Gazette Average Price of Wheat. 





s. d. 


December, 1866 . 


. . 60 3 


January, 1867 . 


. 61 4 


February ,, . , 


. 60 10 


March ,, 


. . 59 9 


April „ . 


. 61 6 


May ,, 


. 64 8 


June „ . , 


. 65 4 


July „ . 


. 65 


August „ 


. 67 8 


September ,, . , 


. 62 8 



October, 


1867 


November 


99 


December 


?> 


January, 1 


B68 


February 


99 


March 


99 


April 


99 


May 


99 


June 


99 


July 


J? 



J. 


d. 


66 


6 


69 


5 


67 


4 


70 


3 


73 





73 





73 


3 


73 


9 


6 7 


11 


65 


5 



From that time it fell, and it was very cheap during 
the whole of 1869 and 1870. The effect of this 
cheapness is great in every department of indus- 
try. The working classes, having cheaper food, 
need to spend so much less on that food, and 
have more to spend on other things. In con- 
sequence, there is a gentle augmentation of de- 
mand through almost all departments of trade. 
And this almost always causes a great augmenta- 
tion in what may be called the instrumental trades 
— that is, in the trades which deal in machines 
and instruments used in many branches of com- 
merce, and in the materials for such. Take, for 
instance, the iron trade — 



In the year 1869 we exported 
„ 1870 „ 



99 
99 



1867 
1868 



tons 
2,568,000 
2,7l6,000 

1,882,000 
1,944,000 



5,284,000 



3,826,000 



Increase , . , 1,458,000 



AND SOMETIMES EXCITED. 



H7 



— that is to say, cheap corn operating throughout 
the world, created a new demand for many kinds 
of articles ; the production of a large number of 
such articles being aided by iron in some one of 
its many forms, iron to that extent was exported. 
And the effect is cumulative. The manufacture 
of iron being stimulated, all persons concerned in 
that great manufacture are well off, have more 
to spend, and by spending it encourage other 
branches of manufacture, which again propagate 
the demand ; they receive and so encourage in- 
dustries in a third degree dependent and removed. 

' It is quite true that corn has not been quite so 
cheap during the present year. But even if it 
had been dearer than it is, it would not all at 
once arrest the great trade which former cheap- 
ness had created. The " ball," if we may so say, 
" was set rolling " in 1869 and 1870, and a great 
increase of demand was then created in certain 
trades and propagated through all trades. A 
continuance of very high prices would produce 
the reverse effect ; it would slacken demand in 
certain trades, and the effect would be gradually 
diffused through all trades. But a slight rise 
such as that of this year has no perceptible effect. 

' When the stimulus of cheap corn is added to 
that of cheap money, the full conditions of a great 



f^3 WHY LOMBARD STREET IS OFTEN DULL, 

and diffused rise of prices are satisfied. This 
new employment supplies a mode in which money 
can be invested. Bills are drawn of greater 
number and greater magnitude, and through the 
agencies of banks and discount houses, the sav- 
ings of the country are invested in such bills. 
There is thus a new want and a new purchase- 
money to supply that want, and the consequence 
is the diffused and remarkable rise of price which 
the figures show to have occurred. 

1 The rise has also been aided by the revival of 
credit. This, as need not be at length explained, 
is a great aid to buying, and consequently a great 
aid to a rise of price. Since 1866, credit has 
been gradually, though very slowly, recovering, 
and it is probably as good as it is reasonable or 
proper that it should be. We are now trusting 
as many people as we ought to trust, and as yet 
there is no wild excess of misplaced confidence 
which would make us trust those whom we ought 
not to trust/ 

The process thus explained is the common 
process. The surplus of loanable capital which 
lies in the hands of bankers is not employed by 
them in any original way ; it is almost always lent 
to a trade already growing and already improving. 



AND SOMETIMES EXCITED. 



149 



The use of it develops that trade yet farther, and 
this again augments and stimulates other trades. 
Capital may long lie idle in a stagnant condition 
of industry ; the mercantile securities which ex- 
perienced bankers know to be good do not aug- 
ment, and they will not invent other securities, or 
take bad ones. 

In most great periods of expanding industry, 
the three great causes — much loanable capital, 
good credit, and the increased profits derived 
from better-used labour and better-used capital — 
have acted simultaneously ; and though either 
may act by itself, there is a permanent reason 
why mostly they will act together. They both 
tend to grow together, if you begin from a period 
of depression. In such periods credit is bad, and 
industry unemployed ; very generally provisions 
are high in price, and their dearness was one of 
the causes which made the times bad. Whether 
there was or was not too much loanable capital 
when that period begins, there soon comes to be 
too much. Quiet people continue to save part of 
their incomes in bad times as well as in good ; 
indeed, of the two, people of slightly-varying and 
fixed incomes have better means of saving in bad 
times because prices are lower. Quiescent trade 
affords no new securities in which the new saving 



^O WHY LOMBARD STREET IS OFTEN DULL, 

can be invested, and therefore there comes soon 
to be an excess of loanable capital. In a year or 
two after a crisis credit usually improves, as the 
remembrance of the disasters which at the crisis 
impaired credit is becoming fainter and fainter. 
Provisions get back to their usual price, or some 
great industry makes, from some temporary cause, 
a quick step forward. At these moments, there- 
fore, the three agencies which, as has been ex- 
plained, greatly develope trade, combine to de- 
velope it simultaneously. 

The certain result is a bound of national 
prosperity ; the country leaps forward as if by 
magic. But only part of that prosperity has a 
solid reason. As far as prosperity is based on a 
greater quantity of production, and that of the 
right articles — as far as it is based on the in- 
creased rapidity with which commodities of every 
kind reach those who want them — its basis is 
good. Human industry is more efficient, and 
therefore there is more to be divided among man- 
kind. But in so far as that prosperity is based on 
a general rise of prices, it is only imaginary. A 
general rise of prices is a rise only in name ; 
whatever anyone gains on the article which he 
has to sell he loses on the articles which he has to 
buy, and so he is just where he was. The only 



AND SOMETIMES EXCITED. 



151 



real effects of a general rise of prices are these : 
first, it straitens people of fixed incomes, who 
suffer as purchasers, but who have no gain to 
correspond ; and secondly, it gives an extra profit 
to fixed capital created before the rise happened 
Here the sellers gain, but without any equivalent 
loss as buyers. Thirdly, this gain on fixed 
capital is greatest in what may be called the 
industrial ' implements/ such as coal and iron. 
These are wanted in all industries, and in any 
general increase of prices, they are sure to rise 
much more than other things. Everybody wants 
them ; the supply of them cannot be rapidly aug- 
mented, and therefore their price rises very 
quickly. But to the country as a whole, the 
general rise of prices is no benefit at all ; it is 
simply a change of nomenclature for an identical 
relative value in the same commodities. Never- 
theless, most people are happier for it ; they 
think they are getting richer, though they are 
not. And as the rise does not happen on all 
articles at the same moment, but is propagated 
gradually through society, those to whom it first 
comes gain really ; and as at first every one be- 
lieves that he will gain when his own article is 
rising, a buoyant cheerfulness overflows the mer- 
cantile world. 



l$ 2 WHY LOMBARD STREET IS OFTEN DULL, 

This prosperity is precarious as far as it is real, 
and transitory in so far as it is fictitious. The 
augmented production, which is the reason of the 
real prosperity, depends on the full working oi 
the whole industrial organisation — of all capitalists 
and labourers ; that prosperity was caused by 
that full working, and will cease with it. But 
that full working is liable to be destroyed by the 
occurrence of any great misfortune to any con- 
siderable industry. This would cause misfortune 
to the industries dependent on that one, and, as 
has been explained, all through society and back 
again. But every such industry is liable to grave 
fluctuations, and the most important — the pro- 
vision-industries — to the gravest and the sud- 
denest. They are dependent on the casualties oi 
the seasons. A single bad harvest diffused ovei 
the world, a succession of two or three bad 
harvests, even in England only, will raise the 
price of corn exceedingly, and will keep it high. 
And a great and protracted rise in the price of 
corn will at once destroy all the real part of the 
unusual prosperity of previous good times. It 
will change the full working- of the industrial 
machine into an imperfect working ; it will make 
the produce of that machine less than usual in- 
stead of more than usual; instead of there being 



AND SOMETIMES EXCITED. ^3 

more than the average of general dividend to be 
distributed between the producers, there will 
immediately be less than the average. 

And in so far as the apparent prosperity is 
caused by an unusual plentifulness of loanable 
capital and a consequent rise in prices, that 
prosperity is not only liable to reaction, but 
certain to be exposed to reaction. The same 
causes which generate this prosperity will, after 
they have been acting a little longer, generate an 
equivalent adversity. The process is this : the 
plentifulness of loanable capital causes a rise of 
prices ; that rise of prices makes it necessary to 
have more loanable capital to carry on the same 
trade. 100,000/. will not buy as much when 
prices are high as it will when prices are low, it 
will not be so effectual for carrying on business ; 
more money is necessary in dear times than in 
cheap times to produce the same changes in the 
same commodities. Even supposing trade to 
have remained stationary, a greater capital would 
be required to carry it on after such a rise of 
prices as has been described than was necessary 
before that rise. But in this' case the trade will 
not have remained stationary ; it will have in- 
creased — certainly to some extent, probably to a 
great extent. The ' loanable capital/ the lending 



154 WHY LOMBARD STREET IS OETEN DULL, 

of which caused the rise of prices, was lent to 
enable it to augment. The loanable capital lay- 
idle in the banks till some trade started into pros- 
perity, and then was lent in order to develope that 
trade ; that trade caused other secondary de- 
velopments ; those secondary developments en- 
abled more loanable capital to be lent ; and that 
lending caused a tertiary development of trade ; 
and so on through society. 

In consequence, a long-continued low rate of 
interest is almost always followed by a rapid rise 
in that rate. Till the available trade is found it 
lies idle, and can scarcely be lent at all ; some of 
it is not lent. But the moment the available trade 
is discovered — the moment that prices have risen 
— the demand for loanable capital becomes keen. 
For the most part, men of business must carry on 
their regular trade ; if it cannot be carried on 
without borrowing 10 per cent, more capital, 10 
per cent, more capital they must borrow. Very 
often they have incurred obligations which must 
be met ; and if that is so the rate of interest which 
they pay is comparatively indifferent. What is 
necessary to meet their acceptances they will 
borrow, pay for it what they may ; they had better 
pay any price than permit those acceptances to be 
dishonoured. And in less extreme cases men of 



AND SOMETIMES EXCITED. 



155 



business have a fixed capital, which cannot lie 
idle except at a great loss ; a set of labourers which 
must be, if possible, kept together ; a steady con- 
nection of customers, which they would very un- 
willingly lose. To keep all these, they borrow ; 
and in a period of high prices many merchants are 
peculiarly anxious to borrow, because the augmen- 
tation of the price of the article in which they deal 
makes them really see, or imagine that they see, 
peculiar opportunities of profit. An immense new 
borrowing soon follows upon the new and great 
trade, and the rate of interest rises at once, and 
generally rises rapidly. 

This is the surer to happen that Lombard Street 
is, as has been shown before, a very delicate 
market. A large amount of money is held there 
by bankers and by bill-brokers at interest : this they 
must employ, or they will be ruined. It is better 
for them to reduce the rate they charge, and com- 
pensate themselves by reducing the rate they pay, 
rather than to keep up the rate of charge, if by so 
doing they cannot employ all their money. It is 
vital to them to employ all the money on which 
they pay interest. A little excess therefore forces 
down the rate of interest very much. But if that 
low rate of interest should cause, or should aid in 
causing, a great growth of trade, the rise is sure to 



!$6 WHY LOMBARD STREET IS OFTEN DULL, 

be quick, and is apt to be violent. The figures of 
trade are reckoned by hundreds of millions, where 
those of loanable capital count only by millions. 
A great increase in the borrowing demands of 
English commerce almost always changes an excess 
of loanable capital above the demand to a greater 
deficiency below the demand. That deficiency 
causes adversity, or apparent adversity, in trade, 
just as, and in the same manner, that the previous 
excess caused prosperity, or apparent prosperity. 
It causes a fall of price that runs through society; 
that fall causes a decline of activity and a diminu- 
tion of profits — a painful contraction instead of the 
previous pleasant expansion. 

The change is generally quicker because some 
check to credit happens at an early stage of it. 
The mercantile community will have been unusu- 
ally fortunate if during the period of rising prices 
it has not made great mistakes. Such a period 
naturally excites the sanguine and the ardent; they 
fancy that the prosperity they see will last 
always, that it is only the beginning of a greater 
prosperity. They altogether over-estimate the 
demand for the article they deal in, or the work 
they do. They all in their degree— and the ablest 
and the cleverest the most — work much more 
than they should, and trade far above their 



AND SOMETIMES EXCITED. 



157 



means. Every great crisis reveals the excessive 
speculations of many houses which no one before 
suspected, and which commonly indeed had not 
begun or had not carried very far those specula- 
tions, till they were tempted by the daily rise of 
price and the surrounding fever. 

The case is worse, because at most periods of 
great commercial excitement there is some mixture 
of the older and simpler kind of investing mania. 
Though the money of saving persons is in the 
hands of banks, and though, by offering interest, 
banks retain the command of much of it, yet they 
do not retain the command of the whole, or any- 
thing near the whole ; all of it can be used, and 
much of it is used, by its owners. They speculate 
with it in bubble companies and in worthless 
shares, just as they did in the time of the South 
Sea mania, when there were no banks, and as 
they would again in England supposing that 
banks ceased to exist. The mania of 1825 
and the mania of 1866 were striking examples 
of this ; in their case to a great extent, as in 
most similar modern ■ periods to a less extent, 
the delirium of ancient gambling co-operated with 
the milder madness of modern overtrading. At 
the very beginning of adversity, the counters in 
the gambling mania, the shares in the companies 



I58 WHY LOMBARD STREET IS OFTEN DULL, 

created to feed the mania, are discovered to be 
worthless ; down they all go, and with them much 
of credit. 

The good times too of high price almost always 
engender much fraud. All people are most credu- 
lous when they are most happy ; and when much 
money has just been made, when some people are 
really making it, when most people think they are 
making it, there is a happy opportunity for ingeni- 
ous mendacity. Almost everything will be believed 
for a little while, and long before discovery the 
worst and most adroit deceivers are geographically 
or legally beyond the reach of punishment. But 
the harm they have done diffuses harm, for it 
weakens credit still farther. 

When we understand that Lombard Street is 
subject to severe alternations of opposite causes, 
we should cease to be surprised at its seeming 
cycles. We should cease too to be surprised at 
the sudden panics. During the period of reaction 
and adversity, just even at the last instant of 
prosperity, the whole structure is delicate. The 
peculiar essence of our banking system is an 
unprecedented trust between man and man : and 
when that trust is much weakened by hidden 
causes, a small accident may greatly hurt it, 



AND SOMETIMES EXCITED. 



159 



and a great accident for a moment may almost 
destroy it. 

Now too that we comprehend the inevitable 
vicissitudes of Lombard Street, we can also 
thoroughly comprehend the cardinal importance 
of always retaining a great banking reserve. 
Whether the times of adversity are well met or 
ill met depends far more on this than on any 
other single circumstance. If the reserve be 
large, its magnitude sustains credit ; and if it be 
small, its diminution stimulates the gravest appre- 
hensions. And the better we comprehend the 
importance of the banking reserve, the higher we 
shall estimate the responsibility of those who 
keep it. 



l6o THE BANK'S ADMINISTRATION 



CHAPTER VII. 

A MORE EXACT ACCOUNT OF THE MODE IN WHICH 
THE BANK OF ENGLAND HAS DISCHARGED ITS 
DUTY OF RETAINING A GOOD BANK RESERVE, AND 
OF ADMINISTERING IT EFFECTUALLY. 

The preceding chapters have in some degree 
enabled us to appreciate the importance of the 
duties which the Bank of England is bound to 
discharge as to its banking reserve. 

If we ask how the Bank of England has dis- 
charged this great responsibility, we shall be 
struck by three things : first, as has been said 
before, the Bank has never by any corporate act 
or authorised utterance acknowledged the duty, 
and some of its directors deny it ; seco7td (what 
is even more remarkable), no resolution of Par- 
liament, no report of any Committee of Parlia- 
ment (as far as I know), no remembered speech 
of a responsible statesman, has assigned or 
enforced that duty on the Bank ; third (what is 



OF THE RESERVE. j6i 

more remarkable still), the distinct teaching of 
our highest authorities has often been that no 
public duty of any kind is imposed on the Banking 
Department of the Bank ; that, for banking 
purposes, it is only a joint stock bank like any 
other bank ; that its managers should look only 
to the interest of the proprietors and their divi- 
dend ; that they are to manage as the London and 
Westminster Bank or the Union Bank manages. 

At first, it seems exceedingly strange that so 
important a responsibility should be unimposed, 
unacknowledged, and denied ; but the explanation 
is this. We are living amid the vestiges of old 
controversies, and we speak their language, though 
we are dealing with different thoughts and differ- 
ent facts. For more than fifty years — from 1793 
down to 1844 — there was a keen controversy as 
to the public duties of the Bank. It was said to 
be the ' manager ' of the paper currency, and on 
that account many expected much good from it ; 
others said it did great harm ; others again that 
it could do neither good nor harm. But for the 
whole period there was an incessant and fierce 
discussion. That discussion was terminated by 
the Act of 1844. By that Act the currency 
manages itself; the entire working is automatic. 
The Bank of England plainly does not manage — ■ 



I £>2 THE BANK'S ADMINISTRATION 

cannot even be said to manage — the currency any 
more. And naturally, but rashly, the only reason 
upon which a public responsibility used to be 
assigned to the Bank having now clearly come to 
an end, it was inferred by many that the Bank had 
no responsibility. 

The complete uncertainty as to the degree of 
responsibility acknowledged by the Bank of Eng- 
land is best illustrated by what has been said by 
the Bank directors themselves as to the panic of 
1866. The panic of that year, it will be remem- 
bered, happened, contrary to precedent, in the 
spring, and at the next meeting of the Court of 
Bank proprietors — the September meeting — there 
was a very remarkable discussion, which I give at 
length below, * and of which all that is most mate- 
rial was thus described in the ' Economist ' : — 

1 THE GREAT IMPORTANCE OF THE LATE MEETING 
OF THE PROPRIETORS OF THE BANK OF ENGLAND. 

1 The late meeting of the proprietors of the 
Bank of England has a very unusual importance. 
There can be no effectual inquiry now into the 
history of the late crisis. A Parliamentary 
committee next year would, unless something 
strange occur in the interval, be a great waste of 
time. Men of business have keen sensations but 

* See Note D in the Appendix. 



OF THE RESERVE. 1 63 

short memories, and they will care no more next 
February for the events of last May than they 
now care for the events of October 1864. A 
pro forma inquiry, on which no real mind is spent, 
and which everyone knows will lead to nothing, 
is far worse than no inquiry at all. Under these 
circumstances the official statements of the 
Governor of the Bank are the only authentic 
expositions we shall have of the policy of the 
Bank Directors, whether as respects the past or 
the future. And when we examine the proceed- 
ings with care, we shall find that they contain 
matter of the gravest import. 

1 This meeting may be considered to admit and 
recognise the fact that the Bank of England 
keeps the sole banking reserve of the country. 
We do not now mix up this matter with the 
country circulation, or the question whether there 
should be many issuers of notes or only one. We 
speak not of the currency reserve, but of the bank- 
ing reserve — the reserve held against deposits, 
and not the reserve held against notes. We have 
often insisted in these columns that the Bank of 
England does keep the sole real reserve — the sole 
considerable unoccupied mass of cash in the 
country ; but there has been no universal agree- 
ment about it. Great authorities have been 



!64 THE BANK'S ADMINISTRATION 

unwilling to admit it. They have not, indeed, 
formally and explicitly contended against it. If 
they had, they must have pointed out some other 
great store of unused cash besides that at the 
Bank, and they could not find such store. But 
they have attempted distinctions ; — have said that 
the doctrine that the Bank of England keeps 
the sole banking reserve of the country was " not 
a good way of putting it," was exaggerated, and 
was calculated to mislead. 

1 But the late meeting is a complete admission 
that such is the fact. The Governor of the Bank 
said : — 

1 "A great strain has within the last few months 
been put upon the resources of this house, and of 
the whole banking community of London ; and I 
think I am entitled to say that not only this house, 
but the entire banking body, acquitted themselves 
most honourably and creditably throughout that 
very trying period. Banking is a very peculiar 
business, and it depends so much upon credit that 
the least blast of suspicion is sufficient to sweep 
away, as it were, the harvest of a whole year. 
But the manner in which the banking establish- 
ments generally in London met the demands 
made upon them during the greater portion of the 
past half-year affords a most satisfactory proof of 



OF THE RESERVE. j6$ 

the soundness of the principles on which their 
business is conducted. This house exerted itself 
to the utmost— and exerted itself most success- 
fully — to meet the crisis. We did not flinch 
from our post. When the storm came upon 
us, on the morning on which it became known 
that the house of Overend and Co. had failed, we 
were in as sound and healthy a position as any 
banking establishment could hold, and on that day 
and throughout the succeeding week we made 
advances which would hardly be credited. I do 
not believe that anyone would have thought of 
predicting, even at the shortest period beforehand, 
the greatness of those advances. It was not un- 
natural that in this state of things a certain degree 
of alarm should have taken possession of the 
public mind, and that those who required accom- 
modation from the Bank should have gone to the 
Chancellor of the Exchequer and requested the 
Government to empower us to issue notes beyond 
the statutory amount, if we should think that such 
a measure was desirable. But we had to act 
before we could receive any such power, and 
before the Chancellor of the Exchequer was 
perhaps out of his bed we had advanced one-half 
of our reserves, which were certainly thus reduced 
to an amount which we could not witness without 



1 66 TJTJS BANK'S ADMINISTRATION 

regret. But we would not flinch from the duty which 
we conceived was imposed upon us of supporting 
the banking community, and I am not aware that 
any legitimate application made for assistance to 
this house was refused. Every gentleman who 
came here with adequate security was liberally 
dealt with, and if accommodation could not be 
afforded to the full extent which was demanded, 
no one who offered proper security failed to obtain 
relief from this house/' 

1 Now this is distinctly saying that the other 
banks of the country need not keep any such 
banking reserve — any such sum of actual cash — of 
real sovereigns and bank notes, as will help them 
through a sudden panic. It acknowledges a 
" duty " on the part of the Bank of England to 
" support .the banking community/' to make the 
reserve of the Bank of England do for them as 
well as for itself. 

1 In our judgment this language is most just, 
and the Governor of the Bank could scarcely have 
done a greater public service than by using 
language so businesslike and so distinct. Let us 
know precisely who is to keep the banking reserve. 
If the joint stock banks and the private banks and 
the country banks are to keep their share, let us 
determine on that; Mr. Gladstone appeared not 



OF THE RESERVE. 



167 



long since to say in Parliament that it ought to be 
so. But at any rate there should be no doubt 
whose duty it is. Upon grounds which we have 
often stated, we believe that the anomaly of one 
bank keeping the sole banking reserve is so fixeci 
in our system that we cannot change it if we would. 
The great evil to be feared was an indistinct con- 
ception of the fact, and that is now avoided. 

1 The importance of these declarations by the 
Bank is greater, because after the panic of 1857 
the bank did not hold exactly the same language. 
A person who loves concise expressions said lately 
" that Overends broke the Bank in 1866 because 
it went, and in 1857 because it was not let go." 
We need not too precisely examine such language; 
the element of truth in it is very plain — the great 
advances made to Overends were a principal 
event in the panic of 1857 ; the bill-brokers were 
then very much what the bankers were lately — ■ 
they were the borrowers who wanted sudden and 
incalculable advances. But the bill-brokers were 
told not to expect the like again. But Alderman 
Salomons, on the part of the London bankers, 
said, " he wished to take that opportunity of stating 
that he believed nothing could be more satisfactory 
to the managers and shareholders of joint stock 
banks than the testimony which the Governor of 



1 63 THE BANK'S ADMINISTRATION 

the Bank of England had that day borne to the 
sound and honourable manner in which their 
business was conducted. It was manifestly 
desirable that the joint stock banks and the bank- 
ing interest generally should work in harmony 
with the Bank of England ; and he sincerely 
thanked the Governor of the Bank for the kindly 
manner in which he had alluded to the mode in 
which the joint stock banks had met the late 
monetary crisis." The Bank of England agrees 
to give other banks the requisite assistance in case 
of need, and the other banks agree to ask for it. 

' Secondly. The Bank agrees, in fact, if not in 
name, to make unlimited advances on proper 
security to anyone who applies for it. On the 
present occasion 45,000,000/. was so advanced in 
three months. And the Bank do not say to the 
mercantile community, or to the bankers, " Do 
not come to us again. We helped you once. But 
do not look upon it as a precedent. We will not 
help you again." On the contrary, the evident 
and intended implication is that under like cir- 
cumstances the Bank would act again as it has 
now acted/ 

This article was much disliked by many of the 
Bank directors, and especially by some whose 
opinion is of great authority. They thought 



OF THE RESERVE, 



169 



that the ■ Economist ' drew ' rash deductions ' 

from a speech which was in itself ' open to 

some objection ' — which was, like all such 

speeches, defective in theoretical precision, and 

which was at best only the expression of ar. 

opinion by the Governor of that day, which had 

not been authorised by the Court of Directors, 

which could not bind the Bank. However the 

article had at least this use, that it brought out the 

facts. All the directors would have felt a difficulty in 

commenting upon, or limiting, or in differing from, 

a speech of a Governor from the chair. But there 

was no difficulty or delicacy in attacking the 

1 Economist/ Accordingly Mr. Hankey, one of 

the most experienced bank directors, not long after, 

took occasion to observe : — 

1 The "Economist" newspaper has put forth what 

in my opinion is the most mischievous doctrine 

ever broached in the monetary or banking world 

in this country ; viz. that it is the proper function of 

the Bank of England to keep money available at 

all times to supply the demands of bankers who have 

rendered their own assets unavailable. Until such 

a doctrine is repudiated by the banking interest, 

the difficulty of pursuing any sound principle of 

banking in London will be always very great. 

But I do not believe that such a doctrine as that 
8 



170 



THE BANK'S ADMINISTRATION 



bankers are justified in relying on the Bank of 
England to assist them in time of need is generally- 
held by the bankers in London. 

' I consider it to be the undoubted duty of the 
Bank of England to hold its banking deposits 
(reserving generally about one-third in cash) in 
the most available securities ; and in the event of 
a sudden pressure in the money market, by what- 
ever circumstance it may be caused, to bear its full 
share of a drain on its resources. I am ready to 
admit, however, that a general opinion has long 
prevailed that the Bank of England ought to be 
prepared to do much more than this, though I 
confess my surprise at finding an advocate for such 
an opinion in the " Economist."* If it were practi- . 
cable for the Bank to retain money unemployed to 
meet such an emergency, it would be a very un- 
wise thing to do so. But I contend that it is quite 
impracticable, and if it were possible, it would be 
most inexpedient ; and I can only express my regret 
that the Bank, from a desire to do everything in 
its power to afford general assistance in times of 
banking or commercial distress, should ever have 
acted in a way to encourage such an opinion. The 
more the conduct of the affairs of the Bank is made 
to assimilate to the conduct of every other well* 

* Vide Economist of September 22, 1866. 



OF THE RESERVE. 



iy\ 



managed bank in the United Kingdom, the better 
for the Bank, and the better for the community at 
large/ 

I am scarcely a judge, but I do not think Mr. 
Hankey replies to the ' Economist ' very con- 
clusively. 

First. He should have observed that the ques- 
tion is not as to what ' ought to be/ but as to what 
is. The ' Economist ' did not say that the system 
of a single bank reserve was a good system, but 
that it was the system which existed, and which 
must be worked, as you could not change it. 

Secondly. Mr. Hankey should have shown 
' some other store of unused cash ' except the 
reserve in the Banking Department of the Bank of 
England out of which advances in time of panic 
could be made. These advances are necessary, 
and must be made by someone. The ' reserves p 
of London bankers are not such store ; they are 
used cash, not unused ; they are part of the Bank 
deposits, and lent as such. 

Thirdly. Mr. Hankey should have observed 
that we know by the published figures that the 
joint stock banks of London do not keep one-third, 
or anything like one-third, of their liabilities in 
1 cash ' — even meaning by ' cash ' a deposit at the 
Bank of England. One-third of the deposits in 



172 THE BANK'S ADMINISTRATION 

joint stock banks, not to speak of the private 
banks, would be 30,000,000/. ; and the private 
deposits of the Bank of England are 18,000,000/, 
According to his own statement, there is a con- 
spicuous contrast. The joint stock banks, and the 
private banks, no doubt, too, keep one sort oi 
reserve, and the Bank of England a different kind 
of reserve altogether. Mr. Hankey says that the 
two ought to be managed on the same principle ; 
but if so, he should have said whether he would 
assimilate the practice of the Bank of England to 
that of the other banks, or that of the other banks 
to the practice of the Bank of England. 

Fourthly. Mr. Hankey should have observed 
that, as has been explained, in most panics, the 
principal use of a ' banking reserve ' is not to 
advance to bankers ; the largest amount is almost 
always advanced to the mercantile public and to 
bill-brokers. But the point is, that by our system 
all extra pressure is thrown upon the Bank of 
England. In the worst part of the crisis of 1866, 
50,000/. ' fresh money ' could not be borrowed, 
even on the best security — even on Consols — 
except at the Bank of England. There was no 
other lender to new borrowers. 

But my object now is not to revive a past 
controversy, but to show in what an unsatisfactory 



OF THE RESERVE. 



173 



and uncertain condition that controversy has left 
a most important subject. Mr. Hankey's is the 
last explanation we have had of the policy of 
the Bank. He is a very experienced and 
attentive director, and I think expresses, more 
or less, the opinions of other directors. And what 
do we find ? Setting aside and saying nothing 
about the remarkable speech of the Governor in 
1866, w T hich at least (according to the interpretation 
of the ' Economist ') was clear and excellent, Mr. 
Hankey leaves us in doubt altogether as to what 
will be the policy of the Bank of England in the 
next panic, and as to what amount of aid the pub- 
lic may then expect from it. His words are too 
vague. No one can tell what a ' fair share ' means ; 
still less can we tell what other people at some future 
time will say it means. Theory suggests, and ex- 
perience proves, that in a panic the holders of the 
ultimate Bank reserve (whether one bank or many) 
should lend to all that bring good securities quickly, 
freely, and readily. By that policy they allay a 
panic ; by every other policy they intensify it. The 
public have a right to know whether the Bank of 
England — the holders of our ultimate bank re- 
serve — acknowledge this duty, and are ready to 
perform it. But this is now very uncertain. 

If we refer to history, and examine what in 



IJ4 THE BANK'S ADMINISTRATION' 

fact has been the conduct of the Bank directors, 
we find that they have acted exactly as persons 
of their type, character, and position might have 
been expected to act. They are a board of 
plain, sensible, prosperous English merchants ; 
and they have both done and left undone what 
such a board might have been expected to 
do and not to do. Nobody could expect great 
attainments in economical science from such a 
board ; laborious study is for the most part 
foreign to the habits of English merchants. Nor 
could we expect original views on banking, for 
banking is a special trade, and English merchants, 
as a body, have had no experience in it. A 
c board ' can scarcely ever make improvements, 
for the policy of a board is determined by the 
opinions of the most numerous class of its mem- 
bers — its average members — and these are never 
prepared for sudden improvements. A board of 
upright and sensible merchants will always act 
according to what it considers ' safe ' principles — 
that is, according to the received maxims of the 
mercantile world then and there — and in this 
manner the directors of the Bank of England have 
acted nearly uniformly. 

Their strength and their weakness were curiously 
exemplified at the time when they had the most 



OF THE RESERVE. 1 75 

power. After the suspension of cash payments 
in 1797, the directors of the Bank of England 
could issue what notes they liked. There was no 
check ; these notes could not come back upon the 
Bank for payment ; there was a great temptation to 
extravagant issue, and no present penalty upon it. 
But the directors of the Bank withstood the 
temptation ; they did not issue their inconvertible 
notes extravagantly. And the proof is, that for 
more than ten years after the suspension of cash 
payments the Bank paper was undepreciated, and 
circulated at no discount in comparison with gold. 
Though the Bank directors of that day at last 
fell into errors, yet on the whole they acted with 
singular judgment and moderation. But when, in 
1 8 1 o, they came to be examined as to their reasons, 
they gave answers that have become almost clas- 
sical by their nonsense. Mr. Pearse, the Governor 
of the Bank, said : — 

Tn considering this subject, with reference to 
the manner in which bank-notes are issued, result- 
ing from the applications made for discounts to 
supply the necessary want of bank-notes, by which 
their issue in amount is so controlled that it can 
never amount to an excess, I cannot see how the 
amount of bank-notes issued can operate upon the 
price of bullion, or the state of the exchanges ;. 



i?6 



THE BANK'S ADMINISTRATION 



and therefore I am individually of opinion that the 
price of bullion, or the state of the exchanges, 
can never be a reason for lessening the amount 
of bank-notes to be issued, always understanding 
the control which I have already described. 

1 Is the Governor of the Bank of the same 
opinion which has now been expressed by the 
Deputy-Governor ? 

1 Mr. Whitmore — I am so much of the same 
opinion, that I never think it necessary to advert 
to the price of gold, or the state of the exchange, 
on the days on which we make our advances. 

' Do you advert to these two circumstances with 
a view to regulate the general amount of your 
advances ? — I do not advert to it with a view to 
our general advances, conceiving it not to bear 
upon the question/ 

And Mr. Harman, another Bank director, 
expressed his opinion in these terms : — ' I must 
very materially alter my opinions before I can 
suppose that the exchanges will be influenced by 
any modifications of our paper currency.' 

Very few persons perhaps could have managed 
to commit so many blunders in so few words. 

But it is no disgrace at all to the Bank directors 
of that day to have committed these blunders. 
They spoke according to the best mercantile 



OF THE RESERVE. 1 77 

opinion of England. The City of London and 
the House of Commons both approved of what 
they said ; 'those who dissented were said to be 
abstract thinkers and unpractical men. The Bank 
directors adopted the ordinary opinions, and pur- 
sued the usual practice of their time. It was this 
* routine ' that caused their moderation. They 
believed that so long as they issued ' notes ' only 
at 5 per cent., and only on the discount of good 
bills, those notes could not be depreciated. And 
as the number of ' good ' bills — bills which sound 
merchants know to be good — does not rapidly 
increase, and as the market rate of interest was 
often less than 5 per cent., these checks on over- 
issue were very effective. They failed in time, 
and the theory upon which they were defended 
was nonsense ; but for a time their operation was 
powerful and excellent. 

Unluckily, in the management of the matter 
before us— the management of the Bank reserve — ■ 
the directors of the Bank of England were neither 
acquainted with right principles, nor were th' 
protected by a judicious routine. They could no. 
be expected themselves to discover such principles. 
The abstract thinking* of the world is never to be 
expected from persons in high places ; the ad- 
ministration of first-rate current transactions is a 
8* 



iy$ THE BANK'S ADMINISTRATION 

most engrossing business, and those charged with 
them are usually but little inclined to think on 
points of theory, even when such thinking most 
nearly concerns those transactions. No doubt 
when men's own fortunes are at stake, the instinct 
of the trader does somehow anticipate the con- 
clusions of the closet. But a board has no in- 
stincts when it is not getting an income for its 
members, and when it is only discharging a duty 
of office. During the suspension of cash pay- 
ments — a suspension which lasted twenty-two 
years — all traditions as to a cash reserve had died 
away. After 1819 the Bank directors had to dis- 
charge the duty of keeping a banking reserve, 
and (as the law then stood) a currency reserve 
also, without the guidance either of keen interests, 
or good principles, or wise traditions. 

Under such circumstances, the Bank directors 
inevitably made mistakes of the gravest magnitude. 

The first time of trial came in 1825. In that 
year the Bank directors allowed their stock of 
bullion to fall in the most alarming manner : — 

£ 

On Dec. 24, 1824, the coin and bullion in the Bank 

was 10,721,000 

On Dec. 25, 1825, it was reduced to 1,260,000 

--and the consequence was a panic so tremendous 



OF THE RESERVE. 



179 



that its results are well remembered after nearly 
fifty years. In the next period of extreme trial — 
in 1837-9 — the Bank was compelled to draw for 
2,000,000/. on the Bank of France ; and even after 
that aid the directors permitted their bullion, 
which was still the currency reserve as well as 
the banking reserve, to be reduced to 2,404,000/. : 
a great alarm pervaded society, and generated an 
eager controversy, out of which ultimately emerged 
the Act of 1844. The next trial came in 1847, 
and then the Bank permitted its banking reserve 
(which the law had now distinctly separated) to fall 
to 1,176,000/. ; and so intense was the alarm, that 
the executive Government issued a letter of 
licence, permitting the Bank, if necessary, to 
break the new law, and, if necessary, to borrow 
from the currency reserve, which was full, in aid 
of the banking reserve, which was empty. Till 
1857 there was an unusual calm in the money 
market, but in the autumn of that year the Bank 
directors let the banking reserve, which even in 
October was far too small, fall thus: 

£ 

Oct. 30 4,024,000 

„ 17 . . ... . 3,217,000 

„ 24 . . . . . . 3,485,000 

„ 3 1 2,258,000 

Nov. 6 2,155,000 

» 13 957,000 



ISO THE BANK'S ADMINISTRATION 

And then a letter of licence like that of 1847 
was not only issued, but used. The Ministry of 
the day authorised the Bank to borrow from the 
currency reserve in aid of the banking reserve, 
and the Bank of England did so borrow several 
hundred pounds till the end of the month of 
November. A more miserable catalogue than 
that of the failures of the Bank of England to 
keep a good banking reserve in all the seasons 
of trouble between 1825 and 1857 is scarcely to 
be found in history. 

But since 1857 there has been a great improve- 
ment. By painful events and incessant discussions, 
men of business have now been trained to see that 
a large banking reserve is necessary, and to 
understand that, in the curious constitution of the 
English banking world, the Bank of England is 
the only body which could effectually keep it. 
They have never acknowledged the duty ; some 
of them, as we have seen, deny the duty ; still they 
have to a considerable extent begun to perform the 
duty. The Bank directors, being experienced and 
able men of business, comprehended this like other 
men of business. Since 1857 they have always 
kept, I do not say a sufficient banking reserve, but 
a fair and creditable banking reserve, and one al- 
together different from any which they kept before. 



OF THE RESERVE. jgl 

At one period the Bank directors even went farther : 
they made a distinct step in advance of the public 
intelligence ; they adopted a particular mode of 
raising the rate of interest, which is far more 
efficient than any other mode. Mr. Goschen 
observes, in his book on the Exchanges : — 

1 Between the rates in London and Paris, the 
expense of sending gold to and fro having been 
reduced to a minimum between the two cities, the 
difference can never be very great ; but it must 
not be forgotten that, — the interest being taken 
at a percentage calculated per annum, and the 
probable profit having, when an operation in 
three-month bills is contemplated, to be divided 
by four, whereas the percentage of expense has 
to be wholly borne by the one transaction, — a 
very slight expense becomes a great impediment. 
If the cost is only \ per cent., there must be a 
profit of 2 per cent, in the rate of interest, or | 
per cent, on three months, before any advantage 
commences ; and thus, supposing that Paris capi- 
talists calculate that they may send their gold 
aver to England for \ per cent, expense, and 
chance their being so favoured, by the Exchanges 
as to be able to draw it back without any cost at 
all, there must nevertheless be an excess of more 
than 2 per cent, in the London rate of interest 



l$2 THE BANK'S ADMINISTRATION 

over that in Paris, before the operation of sending 
gold over from France, merely for the sake of the 
higher interest, will pay/ 

Accordingly, Mr. Goschen recommended that 
the Bank of England should, as a rule, raise theii 
rate by steps of i per cent, at a time when the object 
of the rise was to affect the ' foreign Exchanges/ 
And the Bank of England, from i860 onward, 
have acted upon that principle. Before that time 
they used to raise their rate almost always by 
steps of \ per cent., and there was nothing in the 
general state of mercantile opinion to compel them 
to change their policy. The change was, on the 
contrary, most unpopular. On this occasion, and, 
as far as I know, on this occasion alone, the Bank 
of England made an excellent alteration of their 
policy, which was not exacted by contemporary 
opinion, and which was in advance of it. 

The beneficial results of the improved policy 
of the Bank were palpable and speedy. We were 
enabled by it to sustain the great drain of silver 
from Europe to India to pay for Indian cotton in 
the years between 1 862-1 865. In the autumn of 
1864 there was especial danger; but, by a rapid 
and able use of their new policy, the Bank of 
England maintained an adequate reserve, and 
preserved the country from calamities which, if 



OF THE RESERVE. ^3 

we had looked only to precedent, would have 
seemed inevitable. All the causes which produced 
the panic of 1857 were in action in 1864 — the 
drain of silver in 1864 and the preceding year 
was beyond comparison greater than in 1857 and 
the years before it — and yet in 1864 there was 
no panic. The Bank of England was almost 
immediately rewarded for its adoption of right 
principles by finding that those principles, at a 
severe crisis, preserved public credit. 

In 1866 undoubtedly a panic occurred, but I do 
not think that the Bank of England can be blamed 
for it. They had in their till an exceedingly good 
reserve according to the estimate of that time — a 
sufficient reserve, in all probability, to have coped 
with the crises of 1847 and 1857. The suspension 
of Overend and Gurney — the most trusted private 
firm in England — caused an alarm, in suddenness 
and magnitude, without example. What was the 
effect of the Act of 1844 on the panic of 1866 is a 
question on which opinion will be long divided ; 
but I think it will be generally agreed that, acting 
under the provisions of that law, the directors of 
:he Bank of England had in their banking depart- 
ment in that year a fairly large reserve — quite as 
large a reserve as anyone expected them to keep 
— to meet unexpected and painful contingencies. 



lS4 ?HE BANK'S ADMINISTRATION' 

From 1866 to 1870 there was almost an un- 
broken calm on the money market. The Bank 
of England had no difficulties to cope with ; there 
was no opportunity for much discretion. The 
money market took care of itself. But in 1870 
the Bank of France suspended specie payments, and 
from that time a new era begins. The demands 
on this market for bullion have been greater, and 
have been more incessant, than. they ever were 
before, for this is now the only bullion market. This 
has made it necessary for the Bank of England to 
hold a much larger banking reserve than was ever 
before required, and to be much more watchful than 
in former times lest that banking reserve should on 
a sudden be dangerously diminished. The forces 
are greater and quicker than they used to be, and 
a firmer protection and a surer solicitude are 
necessary. But I do not think the Bank of Eng- 
land is sufficiently aware of this. All the govern- 
ing body of the Bank certainly are not aware of it. 
The same eminent director to whom I have before 
referred, Mr. Hankey, published in the ' Times ' 
an elaborate letter, saying again that one-third 
of the liabilities were, even in these altered times, 
a sufficient reserve for the Banking Department 
of the Bank of England, and that it was no part of 
the business of the Bank to keep a supply of 



OF THE RESERVE. 



I8 5 



1 bullion for exportation/ which was exactly the 
most mischievous doctrine that could be main- 
tained when the Banking Department of the Bank 
of England had become the only great repository 
in Europe where gold could at once be obtained, 
and when, therefore, a far greater store of bullion 
ought to be kept than at any former period. 

And besides this defect of the present time, 
there are some chronic faults in the policy 
of the Bank of England, which arise, as will be 
presently explained, from grave defects in its 
form of government. 

There is almost always some hesitation when a 
Governor begins to reign. He is the Prime 
Minister of the Bank Cabinet ; and when so im- 
portant a functionary changes, naturally much else 
changes too. If the Governor be weak, this kind 
of vacillation and hesitation continues throughout 
his term of office. The usual defect then is, that 
the Bank of England does not raise the rate of 
interest sufficiently quickly. It does raise it ; in 
the end it takes the alarm, but it does not take 
the alarm sufficiently soon. A cautious man, in a 
new office, does not like strong measures. Bank 
Governors are generally cautious men ; they are 
taken from a most cautious class ; in consequence 
they are very apt to temporise and delay. But 



X86 THE BANK'S ADMINISTRATION 

almost always the delay in creating a stringency 
only makes a greater stringency inevitable. The 
effect of a timid policy has been to let the gold 
out of the Bank, and that gold must be recov- 
ered. It would really have been far easier to 
have maintained the reserve by timely measures 
than to have replenished it by delayed measures ; 
but new Governors rarely see this. 

Secondly. Those defects are apt, in part, or as 
a whole, to. be continued throughout the reign of 
a weak Governor. The objection to a decided 
policy, and the indisposition to a timely action, 
which are excusable in one whose influence is 
beginning, and whose reign is new, is continued 
through the whole reign of one to whom those 
defects are natural, and who exhibits those defects 
in all his affairs. 

Thirdly. This defect is enhanced, because, as has 
so often been said, there is now no adequate rule 
recognised in the management of the banking 
reserve. Mr. Weguelin, the last Bank Governor 
who has been examined, said that it was sufficient 
for the Bank to keep from one-fourth to one-third 
of its banking liabilities as a reserve. But no one 
now would ever be content if the banking reserve 
were near to one-fourth of its liabilities. Mr. 
Hankey, as I have shown, considers ' about a third ' 



OF THE RESERVE. 



187 



as the proportion of reserve to liability at which 
the Bank should aim ; but he does not say whether 
he regards a third as the minimum below which 
the reserve in the Banking Department should 
never be, or as a fair average, about which the 
reserve may fluctuate, sometimes being greater 
or at others less. 

In a future chapter I shall endeavour to show 
that one-third of its banking liabilities is at present 
by no means an adequate reserve for the Banking 
Department — that it is not even a proper minimum, 
far less a fair average ; and I shall allege what 
seem to me good reasons for thinking that, unless 
the Bank aim by a different method at a higher 
standard, its own position may hereafter be peril- 
ous, and the public may be exposed to disaster. 



11. 



But, as has been explained, the Bank of England 
is bound, according to our system, not only to keep 
a good reserve against a time of panic, but to use 
that reserve effectually when that time of panic 
comes. The keepers of the Banking reserve, 
whether one or many, aire obliged then to yse that 
reserve for their own safety. If they permit all 



!88 THE BANK'S ADMINISTRATION 

other forms of credit to perish, their own will 
perish immediately, and in consequence. 

As to the Bank of England, however, this is 
denied. It is alleged that the Bank of England 
can keep aloof in a panic ; that it can, if it will, 
let other banks and trades fail ; that if it chooses, 
it can stand alone, and survive intact while all else 
perishes around it. On various occasions, most 
influential persons, both in the government of the 
Bank and out of it, have said that such was their 
opinion. And we must at once see whether this 
opinion is true or false, for it is absurd to attempt 
to estimate the conduct of the Bank of England 
during panics before we know what the precise 
position of the Bank in a panic really is. 

The holders of this opinion in its most extreme 
form say, that in a panic the Bank of England can 
stay its hand at any time ; that, though it has 
advanced much, it may refuse to advance more ; 
that though the reserve may have been reduced 
by such advances, it may refuse to lessen it still 
further ; that it can refuse to make any further 
discounts ; that the bills which it has discounted 
will become due ; that it can refill its reserve by 
the payment of those bills ; that it can sell stock 
or other securities, and so replenish its reserve 
still further. But in this form the notion scarcely 



OF THE RESERVE, jgg 

merits serious refutation. If the Bank reserve 
has once become low, there are, in a panic, no 
means of raising it again. Money parted with at 
such a time is very hard to get back ; those who 
have taken it will not let it go — not, at least, unless 
they are sure of getting other money in its place. 
And at such instant the recovery of money is as 
hard for the Bank of England as for any one else, 
probably even harder. The difficulty is this : if 
the Bank decline to discount, the holders of the 
bills previously discounted cannot pay. As has 
been shown, trade in England is largely carried on 
with borrowed money. If you propose greatly to 
reduce that amount, you will cause many failures 
unless you can pour in from elsewhere some equi- 
valent amount of new money. But in a panic 
there is no new money to be had ; everybody who 
has it clings to it, and will not part with it. 
Especially what has been advanced to merchants 
cannot easily be recovered ; they are under 
immense liabilities, and they will not give back a 
penny which they imagine that even possibly they 
may need to discharge those liabilities. And 
bankers are in even greater terror. In a panic 
they will not discount a host of new bills ; they 
are engrossed with their own liabilities and those 
of their own customers, and do not care for those 



I QO THE BANK'S ADMINISTRATION 

of others. The notion that the Bank of England 
can stop discounting in a panic, and so obtain fresh 
money, is a delusion. It can stop discounting, of 
course, at pleasure. But if it does, it will get in 
no new money ; its bill case will daily be more 
and more packed with bills c returned unpaid.' 

The sale of stock, too, by the Bank of England 
in the middle of a panic is impossible. The bank 
at such a time is the only lender on stock, and it 
is only by loans from a bank that large purchases, 
at such a moment, can be made. Unless the 
Bank of England lend, no stock will be bought. 
There is not in the country any large sum of un- 
used ready money ready to buy it. The only 
unused sum is the reserve in the Banking Depart- 
ment of the Bank of England : if, therefore, in a 
panic that Department itself attempt to sell stock, 
the failure would be ridiculous. It would hardly be 
able to sell any at all. Probably it would not sell 
fifty pounds' worth. The idea that the Bank can, 
during a panic, replenish its reserve in this or in 
any other manner when that reserve has once been 
allowed to become empty, or nearly empty, is too 
absurd to be steadily maintained, though I fear 
that it is not yet wholly abandoned. 

The second and more reasonable conception 
of the independence of the Bank of England is, 



OF THE RESERVE. 



191 



however, this : — It may be said, and it is said, 
that if the Bank of England stop at the beginning 
of a panic, if it refuse to advance a shilling more 
than usual, if it begin the battle with a good 
banking reserve, and do not diminish it by extra 
loans, the Bank of England is sure to be safe. 
But this form of the opinion, though more reason- 
able and moderate, is not, therefore, more true. 
The panic of 1866 is the best instance to test it. 
As everyone knows, that panic began quite sud- 
denly, on the fall of ' Overends.\ Just before, the 
Bank had 5,812,000/. in its reserve; in fact, it 
advanced 13,000,000/. of new money in the next 
few days, and its reserve went down to nothing, 
and the Government had to help. But if the 
Bank had not made these advances, could it have 
kept its reserve ? 

Certainly it could not. It could not have retained 
its own deposits. A large part of these are the 
deposits of bankers, and they would not consent 
to help the Bank of England in a policy of isola 
tion. They would not agree to suspend payments 
themselves, and permit the Bank of England to 
survive, and get all their business. They would 
withdraw their deposits from the Bank ; they 
would not assist it to stand erect amid their ruin. 
But even if this were not so, even if the banks 



IQ2 THE BANK'S ADMINISTRATION 

were willing to keep their deposits at the Bank 
while it was not lending, they would soon find that 
they could not do it. They are only able to keep 
those deposits at the Bank by the aid of the 
Clearing-house system, and if a panic were to 
pass a certain height, that system, which rests on 
confidence, would be destroyed by terror. 

The common course of business is this. A B 
having to receive 50,000/. from C D takes C D's 
cheque on a banker crossed, as it is called, and, 
therefore, only payable to another banker. He 
pays that cheque to his own credit with his own 
banker, who presents it to the banker on whom it 
is drawn, and if good it is an item between them in 
the general clearing or settlement of the afternoon. 
But this is evidently a very refined machinery, 
which a panic will be apt to destroy. At the first 
stage A B may say to his debtor CD, 'I cannot 
take your cheque, I must have bank-notes.' If it 
is a debt on securities, he will be very apt to say 
this. The usual practice — credit being good — 
is for the creditor to take the debtor's cheque, 
and to give up the securities. But if the 
1 securities ' really secure him in a time of difficulty, 
he will not like to give them up, and take a bit of 
paper — a mere cheque, which may be paid or not 
paid. He will say to his debtor, c I can only give 



OF THE RESERVE. 



193 



you your securities if you will give me bank-notes/ 
And if he does say so, the debtor must go to his 
bank, and draw out the 50,000/. if he has it. But 
if this were done on a large scale, the bank's 
1 cash in house ' would soon be gone ; as the 
Clearing-house was gradually superseded it would 
have to trench on its deposit at the Bank of Eng- 
land ; and then the bankers would have to pay so 
much over the counter that they would be unable 
to keep much money at the Bank, even if they 
wished. They would soon be obliged to draw 
out every shilling. 

The diminished use of the Clearing-house, in 
consequence of the panic, would intensify that 
panic. By far the greater part of the bargains of 
the country in moneyed securities is settled on the 
Stock Exchange twice a month, and the number 
of securities then given up for mere cheques, and 
the number of cheques then passing at the Clear- 
ing-house are enormous. If that system collapse, 
the number of failures would be incalculable, and 
each failure would add to the discredit that caused 
the collapse. 

The non-banking customers of the Bank of 

England would be discredited as well as other 

people ; their cheques would not be taken any 

more than those of others ; they would have to 
9 



194 



THE BANK'S ADMINISTRATION 



draw out bank-notes, and the Bank reserve would 
not be enough for a tithe of such payments. 

The matter would come shortly to this : a great 
number of brokers and dealers are under obliga- 
tions to pay immense sums, and in common times 
they obtain these sums by the transfer of certain 
securities. If, as we said just now, No. i has 
borrowed 50,000/. of No. 2 on Exchequer bills, he, 
for the most part, cannot pay No. 2 till he has 
sold or pledged those bills to some one else. 
But till he has the bills he cannot pledge or seL 
them ; and if No. 2 will not give them up till he 
gets his money, No 1. will be ruined, because he 
cannot pay it. And if No. 2 has No. 3 to pay, as is 
very likely, he may be ruined because of No. i's 
default, and No. 4 only on account of No. 3's de- 
fault; and so on without end. On settling day, 
without the Clearing-house, there would be a mass 
of failures, and a bundle of securities. The effect 
of these failures would be a general run on all 
bankers, and on the Bank of England particularly. 

It may indeed be said that the money thus taken 
from the Banking Department of the Bank of 
England would return there immediately ; that 
the public who borrowed it would not know 
where else to deposit it ; that it would be taken 
out in the morning, and put back in the evening. 



OF THE RESERVE. jgj 

But, in the first place, this argument assumes that 
the Banking Department would have enough 
money to pay the demands on it ; and this is a 
mistake : the Banking Department would not have 
a hundredth part of the necessary funds. And 
in the second, a great panic which deranged 
the Clearing-house would soon be diffused all 
through the country. The money therefore 
taken from the Bank of England could not be 
soon returned to the Bank; it would not come 
back on the evening of the day on which it was 
taken out, or for many days ; it would be dis- 
tributed through the length and breadth of the 
country, wherever there were bankers, wherever 
there was trade, wherever there were liabilities, 
wherever there was terror. 

And even in London, so immense a panic 
would soon impair the credit of the Banking 
Department of the Bank of England. That de- 
partment has no great prestige. It was only^ 
created in 1844, and it has failed three times 
since. The world would imagine that what has 
happened before will happen again ; and when 
they have got money, they will not deposit it at 
an establishment which may not be able to repay 
it. This did not happen in former panics, 
because the case we are considering never arose. 



IC/o THE BANK'S ADMINISTRATION 

The Bank was helping the public, and, more or 
less confidently, it was believed that the Govern- 
ment would help the Bank. But if the policy be 
relinquished which formerly assuaged alarm, that 
alarm will be protracted and enhanced, till it touch 
the Banking Department of the Bank itself. 

I do not imagine that it would touch the Is- 
sue Department. I think that the public would 
be quite satisfied if they obtained bank-notes. 
Generally nothing is gained by holding the notes 
of a bank instead of depositing them at a bank. 
But in the Bank of England there is a great 
difference : their notes are legal tender. Whoever 
holds them can always pay his debts, and, except 
for foreign payments, he could want no more. 
The rush would be for bank-notes ; those that 
could be obtained would be carried north, south, 
east, and west, and, as there would not be enough 
for all the country, the Banking Department 
would soon pay away all it had. 

Nothing, therefore, can be more certain than 
that the Bank of England has in this respect no 
peculiar privilege ; that it is simply in the position 
of a Bank keeping the Banking reserve of the 
country ; that it must in time of panic do what all 
other similar banks must do ; that in time of 
panic it must advance freely and vigorously to 
the public out of the reserve. 



OF THE RESERVE. 1 97 

And with the Bank of England, as with other 
Banks in the same case, these advances, if they are 
to be made at all, should be made so as if possible 
to obtain the object for which they are made. The 
end is to stay the panic ; and the advances should, 
if possible, stay the panic. And for this purpose 
there are two rules : — First. That these loans 
should only be made at a very high rate of in- 
terest. This will operate as a heavy fine on 
unreasonable timidity, and will prevent the great- 
est number of applications by persons who do not 
require it. The rate should be raised early in 
the panic, so that the fine may be paid early ; that 
no one may borrow out of idle precaution without 
paying well for it ; that the Banking reserve may 
be protected as far as possible. 

Secondly. That at this rate these advances 
should be made on all good banking securities, 
and as largely as the public ask for them. The 
reason is plain. The object is to stay alarm, and 
nothing therefore should be done to cause alarm. 
But the way to cause alarm is to refuse some one 
who has good security to offer. The news of this 
will spread in an instant through all the money 
market at a moment of terror ; no one can say 
exactly who carries it, but in half an hour it will be 
carried on all sides, and will- intensify the terror 



igS THE BANK'S ADMINISTRATION 

everywhere. No advances indeed need be made 
by which the Bank will ultimately lose. The 
amount of bad business in commercial countries is 
an infinitesimally small fraction of the whole 
business. That in a panic the bank, or banks, 
holding the ultimate reserve should refuse bad 
bills or bad securities will not make the panic really 
worse ; the c unsound ' people are a feeble minority, 
and they are afraid even to look frightened for 
fear their unsoundness may be detected. The 
great majority, the majority to be protected, are the 
' sound ' people, the people who have good se- 
curity to offer. If it is known that the Bank of 
England is freely advancing on what in ordinary 
times is reckoned a good security — on what is 
then commonly pledged and easily convertible — 
the alarm of the solvent merchants and bankers 
will be stayed. But if securities, really good and 
usually convertible, are refused by the Bank, the 
alarm will not abate, the other loans made will 
fail in obtaining their end, and the panic will be- 
come worse and worse. 

It may be said that the reserve in the Banking 
Department will not be enough for all such loans. 
If that be so, the Banking Department must fail. 
But lending is, nevertheless, its best expedient. 
This is the method of making its money go 



OF THE RESERVE. 



199 



the farthest, and of enabling it to get through the 
panic if anything will so enable it. Making no 
loans as we have seen will ruin it ; making large 
loans and stopping, as we have also seen, will ruin 
it. The only safe plan for the Bank is the brave 
plan, to lend in a panic on every kind of current 
security, or every sort on which money is ordinarily 
and usually lent. This policy may not save the 
Bank ; but if it do not, nothing will save it. 

If we examine the manner in which the Bank 
of England has fulfilled these duties, we shall 
find, as we found before, that the true principle 
has never been grasped ; that the policy has been 
inconsistent; that, though the policy has much 
improved, there still remain important particulars 
in which it might be better than it is. 

The first panic of which it is necessary here to 
speak, is that of 1825 : I hardly think we should 
derive much instruction from those of 1793 and 
1797 ; the world has changed too much since ; and 
during the long period of inconvertible currency 
from 1797 to 18 19, the problems to be solved were 
altogether different from our present ones. In 
the panic of 1825, the Bank of England at first 
acted as unwisely as it was possible to act. By 
every means it tried to restrict its advances. The 
reserve being very small, it endeavoured to 



200 THE BANK'S ADMINISTRATION 

protect that reserve by lending as little as possible. 
The result was a period of frantic and almost 
inconceivable violence; scarcely any one knew 
whom to trust; credit was almost suspended; 
the country was, as Mr. Huskisson expressed it, 
within twenty-four hours of a state of barter. 
Applications for assistance were made to the 
Government, but though it was well known that 
the Government refused to act, there was not, as 
far as I know, until lately any authentic narrative 
of the real facts. In the ' Correspondence ' of the 
Duke of Wellington, of all places in the world, 
there is a full account of them. The Duke was 
then on a mission at St. Petersburg, and Sir R. 
Peel wrote to him a letter of which the following 
is a part : — 

1 We have been placed in a very unpleasant 
predicament on the other question — the issue of 
Exchequer Bills by Government. The feeling of 
the City, of many of our friends, of some of the 
Opposition, was decidedly in favour of the issue of 
Exchequer Bills to relieve the merchants and 
manufacturers. 

' It was said in favour of the issue, that the same 
measure had been tried and succeeded in 1793 and 
181 1. Our friends whispered about that we were 
acting quite in a different manner from that in 



OF THE RESERVE. 201 

which Mr. Pitt did act, and would have acted ha 
he been alive. 

1 We felt satisfied that, however plausible were 
the reasons urged in favour of the issue of Exche- 
quer Bills, yet that the measure was a dangerous 
one, and ought to be resisted by the Government. 

1 There are thirty millions of Exchequer Bills 
outstanding. The purchases lately made by the 
Bank can hardly maintain them at par. If there 
were a new issue to such an amount as that con- 
templated — viz., five millions — there would be a 
great danger that the whole mass of Exchequer 
Bills would be at a discount, and would be paid 
into the revenue. If the new Exchequer Bills 
were to be issued at a different rate of interest 
from the outstanding ones — say bearing an interest 
of five per cent. — the old ones would be imme- 
diately at a great discount unless the interest were 
raised. If the interest were raised, the charge on 
the revenue would be of course proportionate to 
the increase of rate of interest. We found that 
the Bank had the power to lend money on deposit 
of goods. As our issue of Exchequer Bills would 
have been useless unless the Bank cashed them, 
as therefore the intervention of the Bank was in 
any event absolutely necessary, and as its inter- 
vention would be chiefly useful by the effect which 



202 THE BANK'S ADMINISTRATION 

it would have in increasing the circulating medium, 
we advised the Bank to take the whole affair into 
their own hands at once, to issue their notes on 
the security of goods, instead of issuing them on 
Exchequer Bills, such bills being themselves 
issued on that security. 

' They reluctantly consented, and, rescued us 
from a very embarrassing predicament/ 

The success of the Bank of England on this 
occasion was owing to its complete adoption of 
right principles. The Bank adopted these princi- 
ples very late ; but when it adopted them it adopted 
them completely. According to the official state- 
ment which I quoted before, 'we/ that is, the Bank 
directors, 'lent money by every possible means,and 
in modes which we had never adopted before ; we 
took in stock on security, we purchased Exchequer 
Bills, we made advances on Exchequer Bills, we not 
only discounted outright, but we made advances 
on deposits of bills of Exchange to an immense 
amount — in short, by every possible means consis- 
tent with the safety of the Bank.' And for the 
complete and courageous adoption of this policy 
at the last moment the directors of the Bank of 
England at that time deserve great praise, for the 
subject was then less understood even than it is 
now ; but the directors of the Bank deserve also 



OF THE RESERVE. 



203 



severe censure, for previously choosing a contrary 
policy ; for being reluctant to adopt the new one ; 
and for at last adopting it only at the request of, 
and upon a joint responsibility with, the Executive 
Government. 

After 1825, there was not again a real 
panic in the money market till 1847. Both 
of the crises of 1837 and 1839 were severe, 
but neither terminated in a panic : both were 
arrested before the alarm reached its final in- 
tensity ; in neither, therefore, could the policy of 
the Bank at the last stage of fear be tested. 

In the three panics since 1844 — in 1847, I §57 r > 
and 1866 — the policy of the Bank has been more 
or less affected by the Act of 1844, and I cannot 
therefore discuss it fully within the limits which 
I have prescribed for myself. I can only state 
two things : First, that the directors of the Bank 
above all things maintain, that they have not been 
in the earlier stage of panic prevented by the Act 
of 1844 from making any advances which they 
would otherwise have then made. Secondly, that 
in the last stage of panic, the Act of 1844 has 
been already suspended, rightly or wrongly, on 
these occasions ; that no similar occasion has ever 
yet occurred in which it has not been suspended ; 
and that, rightly or wrongly, the world confidently 



204 



THE BANK'S ADMINISTRATION 



expects and relies that in all similar cases it will 
be suspended again. Whatever theory may 
prescribe, the logic of facts seems peremptory so 
far. And these principles taken together amount 
to saying that, by the doctrine of the directors, the 
Bank of England ought, as far as they can, to 
manage a panic with the Act of 1 844, pretty much 
as they would manage one without it — in the early 
stage of the panic because then they are not 
fettered, and in the latter because then the fetter 
has been removed. 

We can therefore estimate the policy of the 
Bank of England in the three panics which have 
happened since the Act of 1844, without inquiring 
into the effect of the Act itself. It is certain that 
in all of these panics the Bank has made very 
large advances indeed. It is certain, too, that in 
all of them the Bank has been quicker than it 
was in 1825 ; that in all of them it has less hesi- 
tated to use its banking reserve in making the 
advances which it is one principal object of 
maintaining that reserve to make, and to make at 
once. But there is still a considerable evil. 
No one knows on what kind of securities the Bank 
of England will at such periods make the advances 
which it is necessary to make. 

As we have seen, principle requires that such 



OF THE RESERVE. 2 0$ 

advances, if made at all for the purpose of curing 
panic, should be made in the manner most likely 
to cure that panic. And for this purpose, they 
should be made on everything which in common 
times is good 'banking security/ The evil is, that 
owing to terror, what is commonly good security 
has ceased to be so ; and the true policy is so to 
use the Banking reserve, that if possible the tem- 
porary evil may be stayed, and the common 
coarse of business be restored. And this can only 
be effected by advancing on all good Banking 
securities. 

Unfortunately, the Bank of England do not take 
this course. The Discount office is open for the 
discount of good bills, and makes immense advances 
accordingly. The Bank also advances on consols 
and India securities, though there was, in the crisis 
of 1866, believed to be for a moment a hesitation 
in so doing. But these are only a small part of 
the securities on which money in ordinary times 
can be readily obtained, and by which its repay- 
ment is fully secured. Railway debenture stock is 
as good a security as a commercial bill, and many 
people, of whom I own I am one, think it safer 
than India stock ; on the whole, a great railway is, 
we think, less liable to unforeseen accidents than 
the strange Empire of India. But I doubt if the 



2 o6 THE BANK'S ADMINISTRATION 

Bank of England in a panic would advance on 
railway debenture stock, at any rate no one has 
any authorised reason for saying that it would. 
And there are many other such securities. 

The amount of the advance is the main con- 
sideration for the Bank of England, and not the 
nature of the security on which the advance is 
made, always assuming the security to be good. 
An idea prevails (as I believe) at the Bank of 
England that they ought not to advance during 
a panic on any kind of security on which they do 
not commonly advance. But if bankers for the 
most part do advance on such security in common 
times, and if that security is indisputably good, 
the ordinary practice of the Bank of England 
is immaterial. In ordinary times the Bank is 
only one of many lenders, whereas in a panic it 
is the sole lender, and we want, as far as we can, 
to bring back the unusual state of a time of panic 
to the common state of ordinary times. 

In common opinion there is always great uncer- 
tainty as to the conduct of the Bank : the Bank 
has never laid down any clear and sound policy on 
the subject. As we have seen, some of its directors 
(like Mr. Hankey) advocate an erroneous policy. 
The public is never sure what policy will be 
adopted at the most important moment : it is not 



OF THE RESERVE. 



207 



sure what amount of advance will be made, or on 
what security it will be made. The best pallia- 
tive to a panic is a confidence in the adequate 
amount of the Bank reserve, and in the efficient 
use of that reserve. And until we have on this 
point a clear understanding with the Bank of 
England, both our liability to crises and our terror 
at crises will always be greater than they would 
otherwise be. 



208 THE GOVERNMENT OF THE BANK. 



CHAPTER VIII. 

THE GOVERNMENT OF THE BANK OF ENGLAND. 

The Bank of England is governed by a board of 
directors, a Governor, and a Deputy-Governor; 
and the mode in which these are chosen, and the 
time for which they hold office, affect the whole of 
its business. The board of directors is in fact 
self-electing. In theory a certain portion go out 
annually, remain out for a year, and are subject to 
re-election by the proprietors. But in fact they 
are nearly always, and always if the other direc- 
tors wish it, re-elected after a year. Such has 
been the unbroken practice of many years, and 
it would be hardly possible now to break it. When 
a vacancy occurs by death or resignation, the 
whole board chooses the new member, and they 
do it, as I am told, with great care. For a peculiar 
reason, it is important that the directors should be 
young when they begin ; and accordingly the board 
run over the names of the most attentive and pi o- 



THE GOVERNMENT OF THE BANK. 



209 



mising young men in the old-established firms of 
London, and select the one who, they think, will 
be most suitable for a bank director. There is a 
considerable ambition to fill the office. The status 
which is given by it, both to the individual who 
fills it and to the firm of merchants to which he 
belongs, is considerable. There is surprisingly 
little favour shown in the selection ; there is a 
great wish on the part of the Bank directors for the 
time being to provide, to the best of their ability, 
for the future good government of the Bank. 
Very few selections in the world are made with 
nearly equal purity. There is a sincere desire to 
do the best for the Bank, and to appoint a well- 
conducted young man who has begun to attend 
to business, and who seems likely to be fairly 
sensible and fairly efficient twenty years later. 

The age is a primary matter. The offices of 
Governor and Deputy-Governor are given in 
rotation. The Deputy-Governor always succeeds 
the Governor, and usually the oldest director who 
has not been in office becomes Deputy-Governor. 
Sometimes, from personal reasons, such as ill- 
health or special temporary occupation, the time 
at which a director becomes Deputy-Governor 
may be a little deferred, and, in some few cases, 
merchants in the greatest business have been per- 



2io THE GOVERNMENT OF THE BANK. 

mitted to decline entirely. But for all general 
purposes, the rule may be taken as absolute. 
Save in rare cases, a director must serve his time 
as Governor and Deputy-Governor nearly when 
his turn comes, and he will not be asked to serve 
much before his turn. It is usually about twenty 
years from the time of a man's first election that 
he arrives, as it is called, at the chair. And as 
the offices of Governor and Deputy-Governor are 
very important, a man who fills them should be 
still in the vigour of life. Accordingly, Bank 
directors, when first chosen by the board, are 
always young men. 

At first this has rather a singular effect ; a 
stranger hardly knows what to make of it. Many 
years since, I remember seeing a very fresh and 
nice-looking young gentleman, and being struck 
with astonishment at being told that he was a 
director of the Bank of England. I had always 
imagined such directors to be men of tried sagac- 
ity and long experience, and I was amazed that a 
cheerful young man should be one of them. I 
believe I thought it was a little dangerous. I 
thought such young men could not manage the 
Bank well. I feared they had the power to do 
mischief. 

Further inquiry, however, soon convinced me 



THE GOVERNMENT OF THE BANK. 2 II 

that they had not the power. Naturally, young 
men have not much influence at a board where 
there are many older members. And in the Bank 
of England there is a special provision for depriv- 
ing them of it if they get it. Some of the directors, 
as I have said, retire annually, but by courtesy it 
is always the young ones. Those who have passed 
the chair — that is, w T ho have served the office of 
Governor — always remain. The young part of 
the board is the fluctuating part, and the old part 
is the permanent part ; and therefore it is not sur- 
prising that the young part has little influence. 
The Bank directors may be blamed for many things, 
but they cannot be blamed for the changeableness 
and excitability of a neocracy. 

Indeed, still better to prevent it, the elder 
members of the board — that is, those who have 
passed the chair — form a standing committee of 
indefinite powers, which is called the Committee 
of Treasury. I say ' indefinite powers/ for I am 
not aware that any precise description has ever 
been given of them, and I . doubt if they can be 
precisely described. They are sometimes said to ex- 
ercise a particular control over the relations and ne- 
gotiations between the Bank and the Government. 
But I confess that I believe that this varies very 
much with the character of the Governor for the 



212 THE GOVERNMENT OF THE BANK. 

time being. A strong Governor does much mainly 
upon his own responsibility, and a weak Governor 
does little. Still the influence of the Committee 
of Treasury is always considerable, though not 
always the same. They form a cabinet of mature, 
declining, and old men, just close to the execu- 
tive ; and for good or evil such a cabinet must have 
much power. 

By old usage, the directors of the Bank of Eng- 
land cannot be themselves by trade bankers. This 
is a relic of old times. Every bank was supposed to 
be necessarily, more or less, in opposition to every 
other bank — banks in the same place to be espec- 
ially in opposition. In consequence, in London, 
no banker has a chance of being a Bank director, 
or would ever think of attempting to be one. 
I am here speaking of bankers in the English 
sense, and in the sense that would surprise a 
foreigner. One of the Rothschilds is on the Bank 
direction, and a foreigner would be apt to think 
that they were bankers if any one was. But this 
only illustrates the essential difference between 
our English notions of banking and the continental. 
Ours have attained a much fuller development 
than theirs. Messrs. Rothschild are immense 
capitalists, having, doubtless, much borrowed 
money in their hands. But they do not take 100/ 



THE GOVERNMENT OF THE BANK. 



213 



payable on demand, and pay it back in cheques of 
5/. each, and that is our English banking. The 
borrowed money which they have is in large sums, 
borrowed for terms more or less long. English 
bankers deal with an aggregate of small sums, all 
of which are repayable on short notice, or on 
demand. And the way the two employ their 
money is different also. A foreigner thinks ' an 
Exchange business ' — that is, the buying and 
selling bills on foreign countries — a main part 
of banking. As I have explained, remittance is 
one of the subsidiary conveniences which early 
banks subserve before deposit banking begins. 
But the mass of English country bankers only give 
bills on places in England or on London, and in 
London the principal remittance business has 
escaped out of the hands of the bankers. Most of 
them would not know how to carry through a great 
' Exchange operation/ or to ' bring home the 
returns.' They would as soon think of turning 
silk merchants. The Exchange trade is carried on 
by a small and special body of foreign bill-brokers, 
of whom Messrs. Rothschild are the greatest. One 
of that firm may, therefore, well be on the Bank 
direction, notwithstanding the rule forbidding 
bankers to be there, for he and his family are not 
English bankers, either by the terms on which 



214 TTIE GOVERNMENT OF THE BANK. 

they borrow money, or the mode in which they 
employ it. But as to bankers in the English 
sense of the word, the rule is rigid and absolute. 
Not only no private banker is a director of the 
Bank of England, but no director of any joint 
stock bank would be allowed to become such. The 
two situations would be taken to be incompatible. 
The mass of the Bank directors are merchants 
of experience, employing a considerable capital 
in trades in which they have been brought up, 
and with which they are well acquainted. Many 
of them have information as to the present course 
of trade, and as to the character and wealth of 
merchants, which is most valuable, or rather is all 
but invaluable, to the Bank. Many of them, too, 
are quiet, serious men, who, by habit and nature, 
watch with some kind of care every kind of 
business in which they are engaged, and give an 
anxious opinion on it. Most of them have a 
good deal of leisure, for the life of a man of 
business who employs only his own capital, and 
employs it nearly always in the same way, is by 
no means fully employed. Hardly any capital is 
enough to employ the principal partners time, 
and if such a man is very busy, it is a sign of 
something wrong. Either he is working at detail, 
which subordinates would do better, and which 



THE GOVERNMENT OF THE BANK. 



215 



he had better leave alone, or he is engaged in too 
many speculations, is incurring more liabilities 
than his capital will bear, and so may be ruined. 
In consequence, every commercial city abounds 
in men who have great business ability and ex- 
perience, who are not fully occupied, who wish to 
be occupied, and who are very glad to become 
directors of public companies in order to be occu- 
pied. The direction of the Bank of England has, 
for many generations, been composed of such men. 
Such a government for a joint stock company is 
very good if its essential nature be attended to, and 
very bad if that nature be not attended to. That 
government is composed of men with a high averge 
of general good sense, with an excellent knowledge 
of business in general, but without any special 
knowledge of the particular business in which they 
are engaged. Ordinarily, in joint stock banks and 
companies this deficiency is cured by the selection 
of a manager of the company, who has been speci- 
ally trained to that particular trade, and who en- 
gages to devote all his experience and all his ability 
to the affairs of the company. The directors, and 
often a select committee of them more especially, 
consult with the manager, and after hearing what 
he has to say, decide on the affairs of the company. 
There is in all ordinary joint stock companies a 



2i6 THE GOVERNMENT OF THE BANK. 

fixed executive specially skilled, and a somewhat 
varying council not specially skilled. The fixed 
manager ensures continuity and experience in the 
management, and a good board of directors 
ensures general wisdom. 

But in the Bank of England there is no fixed 
executive. The Governor and Deputy- Governor, 
who form that executive, change every two years. 
I believe, indeed, that such was not the original 
intention of the founders. In the old days of few 
and great privileged companies, the chairman, 
though periodically elected, was practically perma- 
nent so long as his policy was popular. He was 
the head of the ministry, and ordinarily did not 
change unless the opposition came in. But this 
idea has no present relation to the constitution 
of the Bank of England. At present, the Gov- 
ernor and Deputy-Governor almost always change 
at the end of two years ; the case of any longer 
occupation of the chair is so very rare, that it 
need not be taken account of. And the Governor 
and Deputy-Governor of the Bank cannot well be 
shadows. They are expected to be constantly 
present ; to see all applicants for advances out of 
the ordinary routine ; to carry on the almost 
continuous correspondence between the Bank and 
its largest customer — the Government ; to bring 



THE GOVERNMENT OF THE BANK. 



217 



all necessary matters before the board of directors 
or the Committee of Treasury, — in a word, to 
do very much of what falls to the lot of the 
manager in most companies. Under this shifting 
chief executive, there are indeed very valuable 
heads of departments. The head of the Discount 
Department is especially required to be a man of 
ability and experience. But these officers are 
essentially subordinate ; no one of them is like 
the general manager of an ordinary bank — 
the head of all action. The perpetually present 
executive — the Governor and Deputy-Governor 
— make it impossible that any subordinate should 
have that position. A really able and active- 
minded Governor, being required to sit all day in 
the bank, in fact does, and can hardly help doing, 
its principal business. 

In theory, nothing can be worse than this gov- 
ernment for a bank — a shifting executive ; a board 
of directors chosen too young for it to be known 
whether they are able ; a committee of manage- 
ment, in which seniority is the necessary qualifi- 
cation, and, old age the common result ; and no 
trained bankers anywhere. 

Even if the Bank of England were an ordinary 

bank, such a constitution would be insufficient ; but 

its inadequacy is greater, and the consequences 
10 



2i8 THE GOVERNMENT OF THE BANK. 

of that inadequacy far worse, because of its 
greater functions. The Bank of England has to 
keep the sole banking reserve of the country ; 
has to keep it through all changes of the money 
market, and all turns of the Exchanges ; has to 
decide on the instant in a panic what sort of 
advances should be made, to what amounts, and 
for what dates; — and yet it has a constitution 
plainly defective. So far from the government of 
the Bank of England being better than that of 
any other bank — as it ought to be, considering 
that its functions are much harder and graver — 
any one would be laughed at who proposed it as 
a model for the government of a new bank ; and 
that government, if it were so proposed, would 
on all hands be called old-fashioned, and curious. 
As was natural, the effects — good and evil — of 
its constitution are to be seen in every part of the 
Bank's history. On one vital point the Bank's 
management has been excellent. It has done 
perhaps less ' bad business/ certainly less very 
bad business, than any bank of the same size and 
the same age. In all its history I do not know 
that its name has ever been connected with a 
single large and discreditable bad debt. There 
has never been a suspicion that it was c worked p 
for the benefit of any one man, or any combination 



THE GOVERNMENT OF THE BANK, 219 

of men. The great respectability of the directors, 
and the steady attention many of them have 
always given the business of the Bank, have kept 
it entirely free from anything dishonorable and 
discreditable. Steady merchants collected in 
council are an admirable judge of bills and 
securities. They always know the questionable 
standing of dangerous persons ; they are quick to 
note the smallest signs of corrupt transations ; 
and no sophistry will persuade the best of them 
out of their good instincts. You could not have 
made the directors of the Bank of England do 
the sort of business which ' Overends ' at last did, 
except by a moral miracle — except by changing 
their nature. And the fatal career of the Bank 
of the United States would, under their manage- 
ment, have been equally impossible. Of the 
ultimate solvency of the Bank of England, or of 
the eventual safety of its vast capital, even at the 
worst periods of its history, there has not been 
the least doubt. 

But nevertheless, as we have seen, the policy 
of the Bank has frequently been deplorable, and 
at such times the defects of its government have 
aggravated if not caused its calamities. 

In truth the executive of the Bank of England 
is now much such as the executive of a public 



220 THE GOVERNMENT OF THE BANK. 

department of the Foreign Office or the Home 
Office would be in which there was no respon- 
sible permanent head. In these departments of 
Government, the actual chief changes nearly, 
though not quite, as often as the Governor of 
the Bank of England. The Parliamentary Under- 
Secretary — the Deputy-Governor, so to speak, of 
that office — changes nearly as often. And if the 
administration solely, or in its details, depended 
on these two, it would stop, New men could not 
carry it on with vigour and efficiency ; indeed they 
could not carry it on at all. But, in fact, they are 
assisted by a permanent Under-Secretary, who 
manages all the routine business, who is the de- 
pository of the secrets of the office, who embodies 
its traditions, who is the hyphen between changing 
administrations. In consequence of this assistance, 
the continuous business of the department is, for 
the most part, managed sufficiently well, notwith- 
standing frequent changes in the heads of adminis- 
tration. And it is only by such assistance that 
such business could be so managed. The present 
administration of the Bank is an attempt to man- 
age a great, a growing, and a permanently continu- 
ous business without an adequate permanent ele- 
ment, and a competent connecting link. 

In answer, it may be said that the duties which 



THE GOVERNMENT OF THE BANK. 2 2I 

press on the Governor and Deputy-Governor of 
the Bank are not so great or so urgent as those 
which press upon the heads of official departments. 
And perhaps, in point of mere labour, the Gover- 
nor of the Bank has the advantage. Banking never 
ought to be an exceedingly laborious trade. There 
must be a great want of system and a great defi- 
ciency in skilled assistance if extreme labour is 
thrown upon the chief. But in importance, the 
functions of the head of the Bank rank as high as 
those of any department. The cash reserve of the 
country is as precious a deposit as any set of men 
can have the care of. And the difficulty of deal- 
ing with a panic (as the administration of the Bank 
is forced to deal with it) is perhaps a more formid- 
able instant difficulty than presses upon any single 
minister. At any rate, it comes more suddenly, 
and must be dealt with more immediately, than 
most comparable difficulties ; and the judgment, 
the nerve, and the vigour needful to deal with it 
are plainly rare and great. 

The natural remedy would be to appoint 
a permanent Governor of the Bank. Nor, as I 
have said, can there be much doubt that such was 
the intention of its founders. All the old com- 
panies which have their beginning in the seven- 
teenth century had the same constitution, and 



222 THE GOVERNMENT OF THE BANK. 

those of them which have lingered down to our 
time retain it. The Hudson's Bay Company, 
the South Sea Company, the East India Company, 
were all founded with a sort of sovereign executive, 
intended to be permanent, and intended to be 
efficient. This is, indeed, the most natural mode 
of forming a company in the minds of those to 
whom companies are new. Such persons will have 
always seen business transacted a good deal des- 
potically ; they will have learnt the value of prompt 
decision and of consistent policy; they will have 
often seen that business is best managed when 
those who are conducting it could scarcely justify 
the course they are pursuing by distinct argument 
which others could understand. All 'city' people 
make their money by investments, for which there 
are often good argumentative reasons ; but they 
would hardly ever be able, if required before a 
Parliamentary committee, to state those reasons. 
They have become used to act on them without 
distinctly analysing them, and, in a monarchical 
way, with continued success only as a test of their 
goodness. Naturally such persons, when proceed- 
ing to form a company, make it upon the model of 
that which they have been used to see successful. 
They provide for the executive first and above all 
things. How much this was in the minds of the 



THE GOVERNMENT OF THE BANK. 2 23 

founders of the Bank of England may be judged 
of by the name which they gave it. Its corporate 
name is the i Governor 2x1^. Company of the Bank 
of England.' So important did the founders 
think the executive that they mentioned it dis- 
tinctly, and mentioned it first. 

And not only is this constitution of a company 
the most natural in the early days when compa- 
nies were new, it is also that which experience 
has shown to be the most efficient now that com- 
panies have long been tried. Great railway com- 
panies are managed upon no other. Scarcely any 
instance of great success in a railway can be men- 
tioned in which the chairman has not been an 
active and judicious man of business, constantly 
attending to the affairs of the company. A thou- 
sand instances of railway disaster can be easily 
found in which the chairman was only a nominal 
head — a nobleman, or something of that sort — 
chosen for show. ' Railway chairmanship ' has 
become a profession, so much is efficiency valued 
in it, and so indispensable has ability been found 
to be. The plan of appointing a permanent 
1 chairman ' at the Bank of England is strongly 
supported by much modern experience. 

Nevertheless, I hesitate as to its expediency; at 
any rate, there are other plans which, for several 



224 THE GOVERNMENT OF THE BANK. 

reasons, should, I think, first be tried in prefer- 
ence. 

First. This plan would be exceedingly unpopular* 
A permanent Governor of the Bank of England 
would be one of the greatest men in England. He 
would be a little ' monarch ' in the City ; he would 
be far greater than the ' Lord Mayor/ He would 
be the personal embodiment of the Bank of Eng- 
land ; he would be constantly clothed with an 
almost indefinite prestige. Everybody in business 
would bow down before him and try to stand well 
with him, for he might in a panic be able to save 
almost anyone he liked, and to ruin almost anyone 
he liked. A day might come when his favour 
might mean prosperity, and his distrust might mean 
ruin. A position with so much real power and 
so much apparent dignity would be intensely 
coveted. Practical men would be apt to say that 
it was better than the Prime Ministership, for it 
would last much longer, and would have a greater 
jurisdiction over that which practical men would 
most value, — over money. At all events, such a 
Governor, if he understood his business, might 
make the fortunes of fifty men where the Prime 
Minister can make that of one. Scarcely anything 
could be more unpopular in the City than the 
appointment of a little king to reign over them. 



THE GOVERNMENT OF THE BANK. 



22$ 



Secondly. I do not believe that we should 
always get the best man for the post ; often I 
fear that we should not even get a tolerable man. 
There are many cases in which the offer of too 
high a pay would prevent our obtaining the man 
we wish for, and this is one of them. A very 
high pay of prestige is almost always very 
dangerous. It causes the post to be desired by 
vain men, by lazy men, by men of rank ; and 
when that post is one of real and technical busi- 
ness, and when, therefore, it requires much pre- 
vious training, much continuous labour, and much 
patient and quick judgment, all such men are 
dangerous. But they are sure to covet all posts 
of splendid dignity, and can only be kept out of 
them with the greatest difficulty. Probably, in 
every Cabinet there are still some members (in 
the days of the old close boroughs there were 
many) whose posts have come to them not from 
personal ability or inherent merit, but from their 
rank, their wealth, or even their imposing exterior. 
The highest political offices are, indeed, kept clear 
of such people, for in them serious and important 
duties must constantly be performed in the face 
of the world. A Prime Minister, or a Chancellor 
of the Exchequer, or a Secretary of State must 

explain his policy and defend his actions in 
10* 



226 THE GOVERNMENT OF THE BANK. 

Parliament, and the discriminating tact of a critical 
assembly — abounding in experience, and guided 
by tradition — will soon discover what he is. But 
the Governor of the Bank would only perform 
quiet functions, which look like routine, though 
they are not, in which there is no immediate risk 
of success or failure ; which years hence may 
indeed issue in a crop of bad debts, but which 
any grave persons may make at the time to look 
fair and plausible. A large Bank is exactly the 
place where a vain and shallow person in authority, 
if he be a man of gravity and method, as such 
men often are, may do infinite evil in no long 
time, and before he is detected. If he is lucky 
enough to begin at a time of expansion in trade, 
he is nearly sure not to be found out till the time 
of contraction has arrived, and then very large 
figures will be required to reckon the evil he has 
done. 

And thirdly, — I fear that the possession of such 
patronage would ruin any set of persons in whose 
gift it was. The election of the Chairman must be 
placed either in the court of proprietors or that 
of the directors. If the proprietors choose, there 
will be something like the evils of an American 
presidential election. Bank stock will be bought 
in order to confer the qualification of voting at the 



THE GOVERNMENT OF THE BANK. 



227 



election of the ' chief of the City/ The Chairman, 
when elected, may well find that his most active 
supporters are large borrowers of the Bank, and 
he may well be puzzled to decide between his 
duty to the Bank and his gratitude to those who 
chose him. Probably, if he be a cautious man 
of average ability, he will combine both evils ; he 
will not lend so much money as he is asked for, 
and so will offend his own supporters ; but will 
lend some which will be lost, and so the profits of 
the Bank will be reduced. A large body of Bank 
proprietors would make but a bad elective body 
for an office of great prestige ; they would not 
commonly choose a good person, and the person 
they did choose would be bound by promises that 
would make him less good. 

The court of directors would choose better ; a 
small body of men of business would not easily 
be persuaded to choose an extremely unfit man. 
But they would not often choose an extremely 
good man. The really best man would probably 
not be so rich as the majority of the directors, 
nor of so much standing, and not unnaturally 
they would much dislike to elevate to the head- 
ship of the City, one who was much less in the 
estimation of the City than themselves. And they 
would be canvassed in every way and on every 



228 THE GOVERNMENT OF THE BANK. 

side to appoint a man of mercantile dignity or 
mercantile influence. Many people of the greatest 
prestige and rank in the City would covet so great 
a dignity, if not for themselves, at least for some 
friend, or some relative, and so the directors 
would be set upon from every side. 

An election so liable to be disturbed by power- 
ful vitiating causes would rarely end in a good 
choice. The best candidate would almost never 
be chosen ; often, I fear, one would be chosen 
altogether unfit for a post so important. And the 
excitement of so keen an election would altogether 
disturb the quiet of the Bank. The good and 
efficient working of a board of Bank directors 
depends on its internal harmony, and that harmony 
would be broken for ever by the excitement, the 
sayings, and the acts of a great election. The 
board of directors would almost certainly be 
demoralised by having to choose a sovereign, 
and there is no certainty, nor any great likeli- 
hood, indeed, that they would choose a good one. 
In France the difficulty of finding a good body 
to choose the Governor of the Bank has been 
met characteristically. The Bank of France 
keeps the money of the State, and the State 
appoints its governor. The French have gene- 
rally a logical reason to give for all they do, 



THE GOVERNMENT OF THE BANK. 



229 



though perhaps the results of their actions are not 
always so good as the reasons for them. The 
Governor of the Bank of France has not always, 
I am told, been a very competent person ; the 
Sub- Governor, whom the State also appoints, is, 
as we might expect, usually better. But for our 
English purposes it would be useless to inquire 
minutely into this. No English statesman would 
consent to be responsible for the choice of the 
Governor of the Bank of England. After every 
panic, the Opposition would say in Parliament 
that the calamity had been ' grievously aggravated/ 
if not wholly caused, by the ' gross misconduct ' of 
the Governor appointed by the ministry. Or, 
possibly, offices may have changed occupants and 
the ministry in power at the panic would be the 
opponents of the ministry which at a former time 
appointed the Governor. In that case they 
would be apt to feel, and to intimate, a ' grave 
regret ' at the course which the nominee of their 
adversaries had ' thought it desirable to pursue/ 
They would not much mind hurting his feel- 
ings, and if he resigned they would have them- 
selves a valuable piece of patronage to confer on 
one of their own friends. No result could be 
worse than that the conduct of the Bank and the 
management should be made a matter of party 



230 



THE GOVERNMENT OF THE BANK. 



politics, and men of all parties would agree in 
this, even if they agreed in almost nothing else. 

I am therefore afraid that we must abandon the 
plan of improving the government of the Bank ol 
England by the appointment of a permanent 
Governor, because we should not be sure of choos- 
ing a good governor, and should indeed run a great 
risk, for the most part, of choosing a bad one. 

I think, however, that much of the advantage, 
with little of the risk, might be secured by a 
humbler scheme. In English political offices, as was 
observed before, the evil of a changing head is made 
possible by the permanence of a dignified subor- 
dinate. Though the Parliamentary Secretary of 
State and the Parliamentary Under-Secretary go in 
and out with each administration, another Under- 
Secretary remains through all such changes, and 
is on that account called 'permanent.' Now this 
system seems to me in its principle perfectly applic- 
able to the administration of the Bank of England. 
For the reasons which have just been given, a per- 
manent ruler of the Bank of England cannot be 
appointed ; for other reasons, which were just be- 
fore given, some most influential permanent func- 
tionary is essential in the proper conduct of the 
business of the Bank ; and, mutatis mutandis, 
these are the very difficulties, and the very advant- 



THE GOVERNMENT OF THE BANK. 23 1 

ages which have led us to frame our principal 
offices of state in the present fashion. 

Such a Deputy-Governor would not be at all a 
'king' in the City. There would be no mischievous 
prestige about the office ; there would be no attrac- 
tion in it for a vain man ; and there would be no- 
thing to make it an object of a violent canvass or of 
unscrupulous electioneering. The office would be 
essentially subordinate in its character, just like 
the permanent secretary in a political office. The 
pay should be high, for good ability is wanted — but 
no pay would attract the most dangerous class of 
people. The very influential, but not very wise, 
City dignitary who would be so very dangerous is 
usually very opulent ; he would hardly have such 
influence if he were not opulent : what he wants 
is not money, but ' position/ A Governorship of 
the Bank of England he would take almost with- 
out salary ; perhaps he would even pay to get it : 
but a minor office of essential subordination would 
not attract him at all. We may augment the 
pay enough to get a good man, without fearing 
that by such pay we may tempt — as by social 
privilege we should tempt — exactly the sort of 
man we do not want. 

Undoubtedly such a permanent official should 
be a trained banker. There is a cardinal difference 



232 



THE GOVERNMENT OF THE BANK. 



between banking and other kinds of commerce ; you 
can afford to run much less risk in banking than in 
commerce, and you must take much greater precau- 
tions. In common business, the trader can add to the 
cost price of the goods he sells a large mercantile 
profit, say ioto 15 per cent.; but the banker has 
to be content with the interest of money, which 
in England is not so much as 5 per cent, upon the 
average. The business of a banker therefore can- 
not bear so many bad debts as that of a merchant, 
and he must be much more cautious to whom 
he gives credit. Real money is a commodity 
much more coveted than common goods : for 
one deceit which is attempted on a manufacturer 
or a merchant, twenty or more are attempted 
on a banker. And besides, a banker, dealing 
with the money of others, and money payable 
on demand, must be always, as it were, looking 
behind him and seeing that he has reserve enough 
in store if payment should be asked for, which a 
merchant dealing mostly with his own capital need 
not think of. Adventure is the life of commerce, 
but caution, I had almost said timidity, is the life 
of banking ; and I cannot imagine that the long 
series of great errors made by the Bank of England 
in the management of its reserve till after 1857, 
would have been possible if the merchants in the 



THE GOVERNMENT OF THE BANK. 



233 



Bank court had not erroneously taken the same 
view of the Bank's business that they must 
properly take of their own mercantile business. 
The Bank directors have almost always been too 
cheerful as to the Bank's business, and too little 
disposed to take alarm. What we want to intro- 
duce into the Bank court is a wise apprehensive- 
nesSy and this every trained banker is taught by 
the habits of his trade, and the atmosphere of his 
life. 

The permanent Governor ought to give his 
whole time to the business of the Bank. He ought 
to be forbidden to engage in any other concern. 
All the present directors, including the Governor 
and Deputy-Governor, are engaged in their own 
business, and it is very possible, indeed it must 
perpetually have happened, that their own busi- 
ness as merchants most occupied the minds of 
most of them just when it was most important 
that the business of the Bank should occupy them. 
It is at a panic and just before a panic that the 
business of the Bank is most exacting and most 
engrossing. But just at that time the business 
of most merchants must be unusually occupying 
and may be exceedingly critical. By the present 
constitution of the Bank, the attention of its sole 
rulers is most apt to be diverted from the Bank's 



234 THE GOVERNMENT OF THE BANK. 

affairs just when those affairs require that attention 
the most. And the only remedy is the appoint- 
ment of a permanent and influential man, who 
will have no business save that of the Bank, and 
who therefore presumably will attend most to it 
at the critical instant when attention is most 
required. His mind, at any rate, will in a panic be 
free from pecuniary anxiety, whereas many, if not 
all, of the present directors must be incessantly 
thinking of their own affairs and unable to banish 
them from their minds. 

The permanent Deputy-Governor must be a 
director and a man of fair position. He must 
not have to say ' Sir ' to the Governor. There is 
no fair argument between an inferior who has to 
exhibit respect and a superior who has to receive 
respect. The superior can always, and does mostly, 
refute the bad arguments of his inferior ; but the 
inferior rarely ventures to try to refute the bad 
arguments of his superior. And he still more 
rarely states his case effectually ; he pauses, hesi- 
tates, does not use the best word or the most apt 
illustration, perhaps he uses a faulty illustration or 
a wrong word, and so fails because the superior 
immediately exposes him. Important business 
can only be sufficiently discussed by persons who 
can say very much what they like very much as 



THE GOVERNMENT OF THE BANK. 235 

they like to one another. The thought of the 
speaker should come out as it was in his mind, 
and not be hidden in respectful expressions or 
enfeebled by affected doubt. What is wanted at 
the Bank is not a new clerk to the directors — they 
have excellent clerks of great experience now — ■ 
but a permanent equal to the directors, who shall 
be able to discuss on equal terms with them the 
business of the Bank, and have this advantage 
over them in discussion, that he has no other 
business than that of the Bank to think of. 

The formal duties of such a permanent officer 
could only be defined by some one conversant 
with the business of the Bank, and could scarcely 
be intelligibly discussed before the public. Nor 
are the precise duties of the least importance. 
Such an officer, if sound, able, and industrious, 
would soon rule the affairs of the Bank. He 
would be acquainted better than anyone else, both 
with the traditions of the past and with the facts 
of the present ; he would have a great experience ; 
he would have seen many anxious times ; he 
would always be on the watch for their recurrence. 
And he would have a peculiar power of guidance 
at such moments from the nature of the men with 
whom he has most to deal. Most Governors of 
the Bank of England are cautious merchants, not 



236 THE GOVERNMENT OF THE BANK. 

profoundly skilled in banking, but most anxious 
that their period of office should be prosperous 
and that they should themselves escape censure. 
If a ' safe ' course is pressed upon them they are 
likely to take that course. Now it would almost 
always be c safe ' to follow the advice of the great 
standing ' authority ' ; it would always be most 
* unsafe ' not to follow it. If the changing 
Governor act on the advice of the permanent 
Deputy-Governor, most of the blame in case of 
mischance would fall on the latter ; it would be 
said that a shifting officer like the Governor 
might very likely not know what should be done, 
but that the permanent official was put there to 
know it and paid to know it. But if, on the other 
hand, the changing Governor should disregard 
the advice of his permanent colleague, and the 
consequence should be bad, he would be blamed 
exceedingly. It would be said that, ' being with- 
out experience, he had taken upon him to overrule 
men who had much experience ; that when the 
constitution of the Bank had provided them with 
skilled counsel, he had taken on himself to act of his 
own head, and to disregard that counsel ; ' and so 
on ad infinitum. And there could be no sort oi 
conversation more injurious to a man in the City ; 
the world there would say, rightly or wrongly 



THE GOVERNMENT OF THE BANK. 2 ^7 

\ We must never be too severe on errors of judg- 
ment ; we are all making them every day ; if 
responsible persons do their best we can expect 
no more. But this case is different : the Governoi 
acted on a wrong system ; he took upon himself 
an unnecessary responsibility : ' and so a Governor 
who incurred disaster by disregarding his skilled 
counsellor would be thought a fool in the City foi 
ever. In consequence, the one skilled counselloi 
would in fact rule the Bank. 

I believe that the appointment of the new per- 
manent and skilled authority at the Bank is the 
greatest reform which can be made there, and that 
which is most wanted. I believe that such a 
person would give to the decision of the Bank that 
foresight, that quickness, and that consistency in 
which those decisions are undeniably now defi- 
cient. As far as I can judge, this change in the 
constitution of the Bank is by far the most neces- 
sary, and is perhaps more important even than all 
other changes. But, nevertheless, we should re- 
form the other points which we have seen to be 
defective. 

First, the London bankers should not be alto- 
gether excluded from the court of directors. The 
old idea, as I have explained, was that the 
London bankers were the competitors of the Bank 



233 THE GOVERNMENT OF THE BANK. 

of England, and would hurt it if they could. But 
now the London bankers have another relation to 
the Bank which did not then exist, and was not 
then imagined. Among private people they are 
the principal depositors in the Bank; they are 
therefore particularly interested in its stability; the J 
are especially interested in the maintenance of a 
good banking reserve, for their own credit and the 
safety of their large deposits depend on it. And 
they can bring to the court of directors an experi- 
ence of banking itself, got outside the Bank of 
England, which none of the present directors pos- 
sess, for they have learned all they know of bank- 
ing at the Bank itself. There was also an old 
notion that the secrets of the Bank would be 
divulged if they were imparted to bankers. But 
probably bankers are better trained to silence and 
secrecy than most people. And there is only a 
thin partition now between the bankers and the 
secrets of the Bank. Only lately a firm failed of 
which one partner was a director of the London 
and Westminster Bank, and another a director of 
the Bank of England. Who can define or class 
the confidential communications of such persons 
under such circumstances ? 

As I observed before, the line drawn at present 
against bankers is very technical and exclusively 



THE GOVERNMENT OF THE BANK. 



2J9 



English. According to continental ideas, Messrs. 
Rothschild are bankers, if any one is a banker. 
But the house of Rothschild is represented on 
the Bank direction. And it is most desirable that 
it should be represented, for members of that firm 
can give if they choose confidential information 
of great value to the Bank. But, nevertheless, the 
objection which is urged against English bankers 
is at least equally applicable to these foreign 
bankers. They have, or may have, at certain 
periods an interest opposite to the policy of the 
Bank. As the greatest Exchange dealers, they 
may wish to export gold just when the Bank of 
England is raising its rate of interest to prevent 
anyone from exporting gold. The vote of a great 
Exchange dealer might be objected to for plausible 
reasons of contrary interest, if any such reasons 
were worth regarding. But in fact the particular 
interest of single directors is not to be regarded ; 
almost all directors who bring special information 
labour under a suspicion of interest ; they can 
only have acquired that information in present 
business, and such business may very possibly be 
affected for good or evil by the policy of the Bank. 
But you must not on this account seal up the 
Bank hermetically against living information ; you 
must make a fair body of directors upon the 



240 THE GOVERNMENT OF THE BANK. 

whole, and trust that the bias of some individual 
interests will disappear and be lost in the whole. 
And if this is to be the guiding principle, it is not 
consistent to exclude English bankers from the 
court. 

Objection is often also taken to the constitution 
of the Committee of Treasury. That body is com- 
posed of the Governor and Deputy-Governor 
and all the directors who have held those offices ; 
but as those offices in the main pass in rotation, 
this mode of election very much comes to an elec- 
tion by seniority, and there are obvious objections 
to giving, not only a preponderance to age, but a 
monopoly to age. In some cases, indeed, this 
monopoly I believe has already been infringed. 
When directors have on account of the magnitude 
of their transactions, and the consequent engrossing 
nature of their business, declined to fill the chair, 
in some cases they have been asked to be members 
of the Committee of Treasury notwithstanding. 
And it would certainly upon principle seem wiser 
to choose a committee which for some purposes 
approximates to a committee of management by 
competence rather than by seniority. 

An objection is also taken to the large num- 
ber of Bank directors. There are twenty-four 
directors, a Governor and a Deputy- Governor, 



THE GOVERNMENT OF THE BANK. 24 1 

making a total court of twenty-six persons, which 
is obviously too large for the real discussion of 
any difficult business. And the case is worse 
because the court only meets once a week, and only 
sits a very short time. It has been said, with ex- 
aggeration, but not without a basis of truth, that if 
the Bank directors were to sit for four hours, there 
would be ' a panic solely from that.' 'The court/ 
says Mr. Tooke, ' meets at half-past eleven or 
twelve ; and, if the sitting be prolonged beyond 
half-past one, the Stock Exchange and the money 
market become excited, under the idea that a 
change of importance is under discussion ; and 
persons congregate about the doors of the Bank 
parlour to obtain the earliest intimation of the de- 
cision.' And he proceeds to conjecture that the 
knowledge of the impatience without must cause 
haste, if not impatience, within. That the decisions 
of such a court should be of incalculable importance 
is plainly very strange. 

There should be no delicacy as to altering 
the constitution of the Bank of England. The 
existing constitution was framed in times that 
have passed away, and was intended to be used 
for purposes very different from the present. The 
founders may have considered that it would lend 

money to the Government, that it would keep the 
11 



242 



THE GOVERNMENT OF THE BANK. 



money of the Government, that it would issue 
notes payable to bearer, but that it would keep 
the c Banking reserve ' of a great nation no one 
in the seventeenth century imagined. And when 
the use to which we are putting an old thing is a 
new use, in common sense we should think whether 
the old thing is quite fit for the use to which we 
are setting it. ' Putting new wine into old bottles ' 
is safe only when you watch the condition of the 
bottle, and adapt its structure most carefully. 



THE JOINT STOCK BANKS. 243 



CHAPTER IX. 

THE JOINT STOCK BANKS. 

The Joint Stock Banks of this country are a 
most remarkable success. Generally speaking 
the career of Joint Stock Companies in this 
country has been chequered. Adam Smith, 
many years since, threw out many pregnant hints 
on the difficulty of such undertakings — hints 
which even after so many years will well repay 
perusal. But joint stock banking has been 
an exception to this rule. Four years ago I 
threw together the facts on the subject and the 
reasons for them ; and I venture to quote the 
article, because subsequent experience suggests, 
I think, little to be added to it. 

' The main classes of joint stock companies which 
have answered are three : — ist. Those in which 
the capital is used not to work the business but to 
guarantee the business. Thus a bankers business 
— his proper business — does not begin while he is 



244 THE 7 0INT STOCK BANKS. 

using* his own money: it commences when he 
begins to use the capital of others. An insurance 
office in the long run needs no capital ; the 
premiums which are received ought to exceed the 
claims which accrue. In both cases, the capital is 
wanted to assure the public and to induce it to 
trust the concern. 2ndly. Those companies have 
answered which have an exclusive privilege which 
they have used with judgment, or which possibly 
was so very profitable as to enable them to thrive 
with little judgment. 3rdly. Those which have 
undertaken a business both large and simple — 
employing more money than most individuals or 
private firms have at command, and yet such that, 
in Adam Smith's words, " the operations are 
capable of being reduced to a routine or such an 
uniformity of method as admits of no variation." 

1 As a rule, the most profitable of these com- 
panies are banks. Indeed, all the favouring con- 
ditions just mentioned concur in many banks. An 
old-established bank has a "prestige" which 
amounts to a "privileged opportunity" ; though no 
exclusive right is given to it by law, a peculiar 
power is given to it by opinion. The business of 
banking ought to be simple ; if it is hard it is 
wrong. The only securities which a banker, 
using money that he may be asked at short notice 



THE JOINT STOCK BANKS, 245 

to repay, ought to touch, are those which are 
easily saleable and easily intelligible. If there is 
a difficulty or a doubt, the security should be 
declined. No business can of course be quite 
reduced to fixed rules. There must be occasional 
cases which no pre-conceived theory can define. 
But banking comes as near to fixed rules certainly 
as any existing business, perhaps as any possible 
business. The business of an old-established bank 
has the full advantage of being a simple business, 
and in part the advantage of being a monopoly 
business. Competition with it is only open in the 
sense in which competition with " the London 
Tavern " is open ; anyone that has to do with 
either will pay dear for it. 

1 But the main source of the profitableness of 
established banking is the smallness of the requisite 
capital. Being only wanted as a " moral influence/' 
it need not be more than is necessary to secure 
that influence. Although, therefore, a banker 
deals only with the most sure securities, and with 
those which yield the least interest, he can never- 
theless gain and divide a very large profit upon 
his own capital, because the money in his hands 
is so much larger than that capital. 

1 Experience, as shown by plain figures, confirms 
these conclusions. We print at the end of this 



246 



THE JOINT STOCK BANKS. 



article the respective profits of no banks in Eng- 
land, and Scotland, and Ireland, being all in those 
countries of which we have sufficient information 
— the Bank of England excepted. There are no 
doubt others, but they are not quoted even on 
local Stock Exchange lists, and in most cases 
publish no reports. The result of these banks, 
as regards the dividends they pay, is — 





en 

Is 


Capital 


Above 20 per cent. 
Between 15 and 20 per cent. 
„ 10 and 15 per cent. 
. ,, 5 and 10 per cent. 
Under 5 per cent 


IS 
20 

36 
36 

3 


£ 

5,302,767 

5,439,439 

14,056,950 

14,182.379 

1,350,00c 


no 


40,331,535 



— that is to say, above 25 per cent, of the capital 
employed in these banks pays over 15 per cent., 
and 62! per cent, of the capital pays more than 
10 per cent. So striking a result is not to be 
shown in any other joint stock trade. 

1 The period to which these accounts refer was 
certainly not a particularly profitable one — on the 
contrary, it has been specially unprofitable. The 
rate of interest has been very low, and the amount 
of good security in the market small Many 



THE JOINT STOCK BANKS, 247 

banks — to some extent most banks — probably had 
in their books painful reminiscences of 1866. The 
fever of excitement which passed over the nation 
was strongest in the classes to whom banks lent 
most, and consequently the losses of even the 
most careful banks (save of those in rural and 
sheltered situations) were probably greater than 
usual. . But even tried by this very unfavourable 
test banking is a trade profitable far beyond the 
average of trades. 

' There is no attempt in these banks on the whole 
and as a rule to divide too much — on the contrary, 
they have accumulated about 13,000,000/., or 
nearly |rd of their capital, principally out of un- 
divided profits. The directors of some of them 
have been anxious to put away as much as possi- 
ble and to divide as little as possible. 

1 The reason is plain ; out of the banks which 
pay more than 20 per cent., all but one were old- 
established banks, and all those paying between 15 
and 20 per cent, were old banks too. The " privi- 
leged opportunity " of which we spoke is singu- 
larly conspicuous in such figures ; it enables banks 
to pay much, which without it would /^have paid 
much. The amount of the profit is clearly pro- 
portional to the value of the " privileged oppor- 
tunity." All the banks which pay above 20 per 



248 



THE JOINT STOCK BANKS. 



cent., save one, are banks more than 25 years old; 
all those which pay between 15 and 20 are so too. 
A new bank could not make these profits, or even 
by its competition much reduce these profits ; in 
attempting to do so, it would simply ruin itself. 
Not possessing the accumulated credit of years, it 
would have to wind up before it attained that credit. 
'The value of the opportunity too is propor- 
tioned to what has to be paid for it. Some old 
banks have to pay interest for all their money; 
some have much for which they pay nothing. 
Those who give much to their customers have of 
course less left for their shareholders. Thus 
Scotland, where there is always a daily interest, 
has no bank in the lists paying over 1 5 per cent. 
The profits of Scotch banks run thus : — 





Capital 


Dividend 




£ 




Bank of Scotland . 


. 1,500,000 


12 


British Linen Company . 


. 1 ,000,000 


• 13 


Caledonian .... 


125,000 


IO 


Clydesdale . 


900,000 


IO 


Commercial Bank of Scotland 


. 1,000,000 


• 13 


National Bank of Scotland 


. 1 ,000,000 


12 


North of Scotland 


280,000 


IO 


Union Bank of Scotland 


1 ,000,000 


IO 


City of Glasgow 


870,000 


8 


Royal Bank 


. 2,000,000 


8 



9,675,000 



THE JOINT STOCK BANKS. 249 

Good profits enough, but not at all like the profits 
of the London and Westminster, or the other 
most lucrative banks of the South. 

'The Bank of England, it is true, does not seem 
to pay so much as other English banks in this 
way of reckoning. It makes an immense profit, 
but then its capital is immense too. In fact, the 
Bank of England suffers under two difficulties. 
Being much older than the other joint stock banks, 
it belongs to a less profitable era. When it was 
founded, banks looked rather to the profit on their 
own capital, and to the gains of note issue than 
to the use of deposits. The first relations with 
the State were more like those of a finance 
company than of a bank, as we now think of 
banking. If the Bank had not made loans to the 
Government, which we should now think dubious, 
the Bankwduld not have existed, for the Govern- 
ment would never have permitted it. Not only is 
the capital of the Bank of England relatively 
greater, but the means of making profit in the 
Bank of England are relatively less also. By 
custom and understanding the Bank of England 
keep a much greater reserve in unprofitable cash 
than other banks; if they do not keep it, either 
our whole system must be changed or we should 

break up in utter bankruptcy. The earning 
11* 



250 THE JOINT STOCK BANKS. 

faculty of the Bank of England is in proportion 
less than that of other banks, and also the sum on 
which it has to pay dividend is altogether greater 
than theirs. 

1 It is interesting to compare the facts of joint 
stock banking with the fears of it which were felt. 
In 1832, Lord Overstone observed: — "I think 
that joint stock banks are deficient in everything 
requisite for the conduct of the banking business 
except extended responsibility ; the banking busi- 
ness requires peculiarly persons attentive to all 
its details, constantly, daily, and hourly watch- 
ful of every transaction, much more than mer- 
cantile or trading business. It also requires 
immediate prompt decisions upon circumstances 
when they arise, in many cases a decision that 
does not admit of delay for consultation ; it also 
requires a discretion to be exercised -with refer- 
ence to the special circumstances of each case. 
Joint stock banks being of course obliged to 
act through agents and not by a principal, and 
j;herefore under the restraint of general rules, 
cannot be guided by so nice a reference to degrees 
of difference in the character of responsibility of 
parties ; nor can they undertake to regulate the 
assistance to be granted to concerns under tem- 
porary embarrassment by so accurate a reference 



THE JOINT STOCK BANKS. 2JI 

to the circumstances, favourable or unfavourable, 
of each case." 

' But in this very respect, joint stock banks have 
probably improved the business of banking. The 
old private banks in former times used to lend 
much to private individuals ; the banker, as Lord 
Overstone on another occasion explained, could 
have no security, but he formed his judgment of 
the discretion, the sense, and the solvency of those 
to whom he lent. And when London was by 
comparison a small city, and when by comparison 
everyone stuck to his proper business, this 
practice might have been safe. But now that 
London is enormous and that no one can watch 
anyone, such a trade would be disastrous; at 
present, it would hardly be safe in a country town. 
The joint stock banks were quite unfit for the 
business Lord Overstone meant, but then that 
business is quite unfit for the present time/ 

This success of Joint Stock Banking is very con- 
trary to the general expectation at its origin. 
Not only private bankers, such as Lord Overstone 
then was, but a great number of thinking persons 
feared that the joint stock banks would fast 
ruin themselves, and then cause a collapse and 
panic in the country. The whole of English 



252 THE JOINT STOCK BANKS. 

commercial literature between 1830 and 1840 is 
filled with that idea. Nor did it cease in 1840. 
So late as 1845, Sir R. Peel thought the founda- 
tion of joint stock banks so dangerous that he 
subjected it to grave and exceptional difficulty. 
Under the Act of 1845, which he proposed, no 
such companies could be founded except with 
shares of 100/. with 50/. paid up on each ; which 
effectually checked the progress of such banks, 
for few new ones were established for many years, 
or till that act had been repealed. But in this, 
as in many other cases, perhaps Sir R. Peel will 
be found to have been clear-sighted rather than 
far-sighted. He was afraid of certain joint 
stock banks which he saw rising around him ; but 
the effect of his legislation was to give to these very 
banks, if not a monopoly, at any rate an exemption 
from new rivals. No one now founds or can found 
a new private bank, and Sir R. Peel by law pre- 
vented new joint stock banks from being estab- 
lished. Though he was exceedingly distrustful of 
the joint stock banks founded between 1826 and 
1845, yet in fact he was their especial patron, 
and he more than any other man encouraged and 
protected them. 

But in this wonderful success there are two 
dubious points, two considerations of different 



THE JOINT STOCK BANKS. 253 

kinds, which forbid us to say that in other countries, 
even in countries with the capacity of co-operation, 
joint stock banks would succeed as well as we 
have seen that they succeed in England, ist. 
These great Banks have not had to keep so large a 
reserve against their liabilities as it was natural 
that they should, being of first-rate magnitude, 
keep. They were at first, of course, very small 
in comparison with what they are now. They found 
a number of private bankers grouped round the 
Bank of England, and they added themselves to 
the group. Not only did they keep their reserve 
from the beginning at the Bank of England, but 
they did not keep so much reserve as they would 
have kept if there had been no Bank of England. 
For a long time this was hardly noticed. For 
many years questions of the ' currency,' particularly 
questions as to the Act of 1844, engrossed the 
attention of all who were occupied with these sub- 
jects. Even those who were most anxious to 
speak evil of joint stock banks, did not mention 
this particular evil. The first time, as far as I 
know, that it was commented on in any important 
document, was in an official letter written in 1857 
by Mr. Weguelin, who was then Governor of the 
Bank, to Sir George Lewis, who was then 
Chancellor of the Exchequer. The Governor 



254 THE JOINT STOCK BANKS. 

and the Directors of the Bank of England had 
been asked by Sir George Lewis severally to give 
their opinions on the Act of 1844, and all their 
replies were published. In his, Mr. Weguelin 
says : — 

' If the amount of the reserve kept by the Bank 
of England be contrasted with the reserve kept by 
the joint stock banks, a new and hitherto little 
considered source of danger to the credit of the 
country will present itself. The joint stock banks 
of London, judging by their published accounts, 
have deposits to the amount of 30,000,000/. Their 
capital is not more than 3,000,000/., and they have 
on an average 31,000,000/., invested in one way or 
another, leaving only 2,000,000/. as a reserve 
against all this mass of liabilities.' 

But these remarkable words were little observed 
in the discussions of that time. The air was ob- 
scured by other matters. But in this work I have 
said so much on the subject that I need say little 
now. The joint stock banks now keep a main 
part of their reserve on deposit with the bill- 
brokers, or in good and convertible interest- 
bearing securities. From these they obtain a 
large income, and that income swells their profits. 
If they had to keep a much larger part than now 
of that reserve in barren cash, their dividends 



THE 70 INT STOCK' BANKS, 2 $S 

would be reduced, and their present success would 
become less conspicuous. 

The second misgiving, which many calm 
observers more and more feel as to our largest 
joint stock banks, fastens itself on their govern- 
ment. Is that government sufficient to lend well 
and keep safe so many millions ? They are 
governed, as every one knows, by a board of 
directors, assisted by a general manager, and 
there are in London unrivalled materials for com- 
posing good boards of directors. There are very 
many men of good means, of great sagacity 
and great experience in business, who are obliged 
to be in the City every day, and to remain there 
during the day, but who have very much time on 
their hands. A merchant employing solely or prin- 
cipally his own capital has often a great deal of 
leisure. He is obliged to be on the market, and 
to hear what is doing. Every day he has some 
business to transact, but his transactions can be but 
few. His capital can bear only a limited number of 
purchases ; if he bought as much as would fill his 
time from day to day he would soon be ruined, for 
he could not pay for it. Accordingly, many excellent 
men of business are quite ready to become mem- 
bers of boards of directors, and to attend to the 
business of companies, a good deal for the employ- 



256 THE JOINT STOCK BANKS. 

ment's sake. To have an interesting occupation 
which brings dignity and power with it pleases 
them very much. As the aggregation of commerce 
in great cities grows, the number of such men 
augments. A council of grave, careful, and ex- 
perienced men can, without difficulty, be collected 
for a great bank in London, such as never could 
have been collected before, and such as cannot 
now be collected elsewhere. 

There are facilities, too, for engaging a good 
banker to be a manager such as there never were 
before in the world. The number of such persons 
is much on the increase. Any careful person who 
is experienced in figures, and has real sound sense, 
may easily make himself a good banker. The 
modes in which money can be safely lent by a 
banker are not many, and a clear-headed, quiet, 
industrious person may soon learn all that is 
necessary about them. Our intricate law of real 
property is an impediment in country banking, for 
it requires some special study even to comprehend 
the elements of a law which is full of technical 
words, and which can only be explained by narra- 
ting its history. But the banking of great cities is 
little concerned with loans on landed property. 
And all the rest of the knowledge requisite for a 
banker can easily be obtained by anyone who has 



THE JOINT STOCK BANKS. 2 $7 

the sort of mind which takes to it. No doubt there 
is a vast routine of work to be learned, and the 
manager of a large bank must have a great 
facility in transacting business rapidly. But a 
great number of persons are now bred from 
their earliest manhood in the very midst of 
that routine ; they learn it as they would learn 
a language, and come to be no more able to 
unlearn it than they could unlearn a language. 
And the able ones among them acquire an almost 
magical rapidity in effecting the business connected 
with that routine. A very good manager and 
very good board of directors can, without unrea- 
sonable difficulty, be provided for a bank at 
present in London. 

It will be asked, what more can be required ? 
I reply, a great deal. All which the best board 
of directors can really accomplish, is to form a 
good decision on the points which the manager 
presents to them, and perhaps on a few others 
which one or two zealous members of their body 
may select for discussion. A meeting of fifteen 
or eighteen persons is wholly unequal to the 
transaction of more business than this ; it will be 
fortunate, and it must be well guided, if it should 
be found to be equal to so much. The discussion 
even of simple practical points by such a number of 



258 THE JOINT STOCK BANKS. 

persons is a somewhat tedious affair. Many of them 
will wish to speak on every decision of moment, 
and some of them — some of the best of them per- 
haps — will only speak with difficulty and slowly. 
Very generally, several points will be started at 
once, unless the discussion is strictly watched by a 
rigid chairman ; and even on a single point the 
arguments will often raise grave questions which 
cannot be answered, and suggest many more 
issues than can be advantageously decided by the 
meeting. The time required by many persons 
for discussing many questions, would alone 
prevent an assembly of many persons from over- 
looking a large and complicated business. 

Nor is this the only difficulty. Not only would 
a real supervision of a large business by a board 
of directors require much more time than the 
board would consent to occupy in meeting, it 
would also require much more time and much 
more thought than the individual directors would 
consent to give. These directors are only em- 
ploying on the business of the Bank the vacant 
moments of their time, and the spare energies 
of their minds. They cannot give the Bank 
more ; the rest is required for the safe conduct of 
their own affairs, and if they diverted it from 
these affairs they would be ruined. A few of 



THE JOINT STOCK BANKS. 2 $9 

them may have little other business, or they may 
have other partners in the business, on whose 
industry they can rely, and whose judgment 
they can trust ; one or two may have retired from 
business. But for the most part, directors of a 
company cannot attend principally and anxiously 
to the affairs of a company without so far neglect- 
ing their own business as to run great risk of ruin ; 
and if they are ruined, their trustworthiness 
ceases, and they are no longer permitted by 
custom to be directors. 

Nor, even if it were possible really to super- 
vise a business by the effectual and constant 
inspection of fifteen or sixteen rich and capable 
persons, would even the largest business easily 
bear the expense of such a supervision. I say rich, 
because the members of a board governing a 
large bank must be men of standing and note 
besides, or they would discredit the bank ; they 
need not be rich in the sense of being worth 
millions, but they must be known to possess a 
fair amount of capital and be seen to be transact- 
ing a fair quantity of business. But the labour of 
such persons, I do not say their spare powers, 
but their principal energies, fetches a high price. 
Business is really a profession often requiring for 
its practice, quite as muc'i knowledge, and quite as 



2 (5o THE JOINT STOCK BANKS. 

much skill, as law and medicine ; and requiring 
also the possession of money. A thorough man 
of business, employing a fair capital in a trade, 
which he thoroughly comprehends, not only earns 
a profit on that capital, but really makes of his 
professional skill a large income. He has a re- 
venue from talent as well as from money ; and to 
induce sixteen or eighteen persons to abandon 
such a position and such an income in order to 
devote their entire attention to the affairs of a 
joint stock company, a salary must be given 
too large for the bank to pay or for anyone to 
wish to propose. 

And an effectual supervision by the whole board 
being impossible, there is a great risk that the 
whole business may fall to the general manager. 
Many unhappy cases have proved this to be very 
dangerous. Even when the business of joint stock 
banks was far less, and when the deposits entrusted 
to them were very much smaller, a manager some- 
times committed frauds which were dangerous, and 
still oftener made mistakes that were ruinous. 
Actual crime will always be rare ; but, as an unin- 
spected manager of a great bank has the control 
of untold millions, sometimes we must expect to 
see it : the magnitude of the temptation will 
occasionally prevail over the feebleness of human 



THE JOINT STOCK BANKS. 2 6l 

nature. But error is far more formidable than 
fraud : the mistakes of a sanguine manager are 
far more to be dreaded than the theft of a 
dishonest manager. Easy misconception is far 
more common than long-sighted deceit. And 
the losses to which an adventurous and plausible 
manager, in complete good faith, would readily 
commit a bank, are beyond comparison greater 
than any which a fraudulent manager would be 
able to conceal, even with the utmost ingenuity. 
If the losses by mistake in banking and the losses 
by fraud were put side by side, those by mistake 
would be incomparably the greater. There is no 
more unsafe government for a bank than that of 
an eager and active manager, subject only to the 
supervision of a numerous board of directors, 
even though that board be excellent, for the 
manager may easily glide into dangerous and 
insecure transactions, nor can the board effec- 
tually check him. 

The remedy is this : a certain number of the 
directors, either those who have more spare time 
than others, or those who are more ready to sell a 
large part of their time to the bank, must be 
formed into a real working committee, which must 
meet constantly, must investigate every large 
transaction, must be acquainted with the means 



262 THE JOINT STOCK BANKS. 

and standing of every large borrower, and must 
be in such incessant communication with the 
manager that it will be impossible for him to en- 
gage in hazardous enterprises of dangerous mag- 
nitude without their knowing it and having an 
opportunity of forbidding it. In almost all cases 
they would forbid it ; all committees are cautious, 
and a committee of careful men of business, 
picked from a large city, will usually err on the side 
of caution if it err at all. The daily attention 
of a small but competent minor council, to whom 
most of the powers of the directors are delegated, 
and who, like a cabinet, guide the deliberations of 
the board at its meetings, is the only adequate 
security of a large bank from the rash engage- 
ments of a despotic and active general manager. 
Fraud, in the face of such at committee, would 
probably never be attempted, and even now it is 
a rare and minor evil. 

Some such committees are vaguely known to 
exist in most, if not all, our large joint stock banks. 
But their real constitution is not known. No 
customer and no shareholder knows the names 
of the managing committee, perhaps, in any of 
these large banks. And this is a grave error. 
A large depositor ought to be able to ascertain 
who really are the persons that dispose of his 



THE JOINT STOCK BANKS. 2 6$ 

money ; and still more a large shareholder ought 
not to rest till he knows who it is that makes 
engagements on his behalf, and who it is that 
may ruin him if they choose. The committee 
ought to be composed of quiet men of business, 
who can be ascertained by inquiry to be of 
high character and well-judging mind. And if 
the public and the shareholder knew that there 
was such a committee, they would have sufficent 
reasons for the confidence which now is given 
without such reasons. 

A certain number of directors attending daily 
by rotation is, it should be said, no substitute for 
a permanent committee. It has no sufficient 
responsibility. A changing body cannot have 
any responsibility. The transactions which were 
agreed to by one set of directors present on the 
Monday might be exactly those which would be 
much disapproved by directors present on the 
Wednesday. It is essential to the decisions of 
most business, and not least of the banking 
business, that they should be made constantly by 
the same persons ; the chain of transactions must 
pass through the same minds. A large business 
may be managed tolerably by a quiet group of 
second-rate men if those men be always the same ; 
but it cannot be managed at all by a fluctuating 



264 THE JOINT STOCK BANKS. 

body, even of the very cleverest men. You might 
as well attempt to guide the affairs of the nation 
by means of a cabinet similarly changing. 

Our great joint stock banks are imprudent in 
so carefully concealing the details of their govern- 
ment, and in secluding those details from the risk 
of discussion. The answer, no doubt will be, ' Let 
well alone ; as you have admitted, there hardly 
ever before was so great a success as these banks 
of ours : what more do you or can you want ? ' I 
can only say that I want further to confirm this 
great success and to make it secure for the future. 
At present there is at least the possibility of a 
great reaction. Supposing that, owing to defects 
in its government, one even of the greater 
London joint stock banks failed, there would be 
an instant suspicion of the whole system. One 
terra incognita being seen to be faulty, every other 
terra incognita would be suspected. If the real 
government of these banks had for years been 
known, and if the subsisting banks had been known 
not to be ruled by the bad mode of government 
which had ruined the bank that had fallen, then the 
ruin of that bank would not be hurtful. The other 
banks would be seen to be exempt from the 
cause which had destroyed it. But at present the 



THE JOINT STOCK BANKS. 2 6$ 

ruin of one of these great banks would greatly 
impair the credit of all. Scarcely any one knows 
the precise government of any one ; in no case 
has that government been described on authority ; 
and the fall of one by grave misgovernment would 
be taken to show that the others might as easily 
be misgoverned also. And a tardy disclosuure 
even of an admirable constitution would not much 
help the surviving banks : as it was extracted by 
necessity, it would be received with suspicion. A 
sceptical world would say ' of course they say they 
are all perfect now ; it would not do for them to 
say anything else/ 

And not only the depositors and the share- 
holders of these large banks have a grave in- 
terest in their good government, but the public 
also. We have seen that our banking reserve is, 
as compared with our liabilities, singularly small ; 
we have seen that the rise of these great banks 
has lessened the proportion of that reserve to those 
liabilities ; we have seen that the greatest strain 
on the banking reserve is a f panic/ Now, no 
cause is more capable of producing a panic, perhaps 
none is so capable, as the failure of a first-rate 
joint stock bank in London. Such an event 
would have something like the effect of the 

12 



266 THE JOINT STOCK BANKS, 

failure of Overend, Gurney and Co. ; scarcely any 
other event would have an equal effect. And 
therefore, under the existing constitution of our 
banking system the government of these great 
banks is of primary importance to us all. 



267 



CHAPTER X. 



THE PRIVATE BANKS. 



Perhaps some readers of the last part of the last 
chapter have been inclined to say that I must be 
a latent enemy to Joint Stock Banking. At any 
rate, I have pointed out what I think grave defects 
in it. But I fear that a reader of this chapter may, 
on like grounds, suppose that I am an enemy to 
Private Banking. And I can only hope that the 
two impressions may counteract one another, and 
may show that I do not intend to be unfair. 

I can imagine nothing better in theory or more 
successful in practice than private banks as they 
were in the beginning. A man of known wealth, 
known integrity, and known ability is largely en- 
trusted with the money of his neighbours. The 
confidence is strictly personal. His neighbours 
know him, and trust him because they know him. 
They see daily his manner of life, and judge from 
it that their confidence is deserved. In rural 



268 THE PRIVATE BANKS. 

districts, and in former times, it was difficult for a 
man to ruin himself except at the place in which 
he lived ; for the most part he spent his money 
there, and speculated there if he speculated at all. 
Those who lived there also would soon see if he 
was acting in a manner to shake their confidence. 
Even in large cities, as cities then were, it was 
possible for most persons to ascertain with fair 
certainty the real position of conspicuous persons, 
and to learn all which was material in fixing their 
credit. Accordingly the bankers who for a long 
series of years passed successfully this strict and 
continual investigation, became very wealthy and 
very powerful. 

The name ' London Banker ' had especially a 
charmed value. He was supposed to represent, 
and often did represent, a certain union of pecu- 
niary sagacity and educated refinement which was 
scarcely to be found in any other part of society. 
In a time when the trading classes were much 
ruder than they now are, many private bankers 
possessed variety of knowledge and a delicacy of 
attainment which would even now be very rare. 
Such a position is indeed singularly favourable. 
The calling is hereditary ; the credit of the bank 
descends from father to son : this inherited wealth 
soon brings inherited refinement. Banking is a 



THE PRIVATE BANKS. 269 

watchful, but not a laborious trade. A banker, 
even in large business, can feel pretty sure that all 
his transactions are sound, and yet have much 
spare mind. A certain part of his time, and a 
considerable part of his thoughts, he can readily 
devote to other pursuits. And a London banker 
can also have the most intellectual society in the 
world if he chooses it. There has probably very 
rarely ever been so happy a position as that of 
a London private banker ; and never perhaps a 
happier. 

It is painful to have to doubt of the continu- 
ance of such a class, and yet, I fear, we must doubt 
of it. The evidence of figures is against it. In 
1 8 10 there were 40 private banks in Lombard 
Street admitted to the clearing-house : there now 
are only 13. Though the business of banking has 
increased so much since 18 10, this species 01 
banks is fewer in number than it was then. Nor 
is this the worst. The race is not renewed. 
There are not many recognised impossibilities in 
business, but everybody admits ' that you cannot 
found a new private bank.' No such has been 
founded in London, or, as far as I know, in the 
country, for many years. The old ones merge or 
die, and so the number is lessened ; but no new 
ones begin so as to increase that number again. 



270 



THE PRIVATE BANKS. 



The truth is that the circumstances which 
originally favoured the establishment of private 
banks have now almost passed away. The 
world has become so large and complicated that 
it is not easy to ascertain who is rich and who is 
poor. No doubt there are some enormously 
wealthy men in England whose means everybody 
has heard of, and has no doubt of. But these are 
not the men to incur the vaat liabilities of private 
banking. If they were bred in it they might stay 
in it ; but they would never begin it for themselves. 
And if they did, I expect people would begin to 
doubt even of their wealth. It would be said, 
1 What does A B go into banking for? he cannot 
be as rich as we thought.' A millionaire com- 
monly shrinks from liability, and the essence of 
great banking is great liability. No doubt there 
are many ' second-rate ■ rich men, as we now 
count riches, who would be quite ready to add to 
their income the profit of a private bank if only 
they could manage it. But unluckily they cannot 
manage it. Their wealth is not sufficiently 
familiar to the world; they cannot obtain the 
necessary confidence. No new private bank 
is founded in England because men of first-rate 
wealth will not found one, and men not of abso- 
lutely first-rate wealth cannot. 



THE PRIVATE BANKS. 



271 



In the present day, also, private banking is ex- 
posed to a competition against which in its origin 
it had not to struggle. Owing to the changes 
of which I have before spoken, joint stock 
banking has begun to compete with it. In old 
times this was impossible ; the Bank of England 
had a monopoly in banking of the principle of asso- 
ciation. But now large joint stock banks of de- 
posit are among the most conspicuous banks in 
Lombard Street. They have a large paid-up 
capital and intelligible published accounts ; they 
use these as an incessant advertisement, in a 
manner in which no individual can use his own 
wealth. By their increasing progress they effec- 
tually prevent the foundation of any new private 
bank. 

The amount of the present business of private 
banks is perfectly unknown. Their balance sheets 
are effective secrets — rigidly guarded. But none 
of them, except a few of the largest, are believed 
at all to gain business. The common repute of 
Lombard Street might be wrong in a particular 
case, but upon the general doctrine it is almost 
sure to be right. There are a few well-known 
exceptions, but according to universal belief the 
deposits of most private bankers in London tend 
rather to diminish than to increase. 



272 



THE PRIVATE BANKS. 



As to the smaller banks, this naturally would be 
so. A large bank always tends to become larger, 
and a small one tends to become smaller. People 
naturally choose for their banker the banker who 
has most present credit, and the one who has most 
money in hand is the one who possesses such credit. 
This is what is meant by saying that a long estab- 
lished and rich bank has a ' privileged opportunity ' ; 
it is in a better position to do its business than any 
one else is ; it has a great advantage over old 
cOxOipetitors and an overwhelming superiority over 
new comers. New people coming into Lombard 
Street judge by results ; they give to those who 
have : they take their money to the biggest bank 
because it is the biggest. I confess I cannot, 
looking far forward into the future, expect that the 
smaller private banks will maintain their ground. 
Their old connections will not leave them ; there 
will be no fatal ruin, no sudden mortality. But 
the tide will gently ebb, and the course of busi- 
ness will be carried elsewhere. 

Sooner or later, appearances indicate, and prin- 
ciple suggests, that the business of Lombard Street 
will be divided between the joint stock banks and 
a few large private banks. And then we have to 
ask ourselves the question, can those large private 
banks be permanent ? I am sure I should be very 



THE PRIVATE BANKS. 



273 



sorry to say that they certainly cannot, but at the 

same time I cannot be blind to the grave difficulties 

which they must surmount. 

In the first place, an hereditary business of great 

nagnitude is dangerous. The management of 

such a business needs more than common industry 

and more than common ability. But there is no 

security at all that these will be regularly continued 

in each generation. The case of Overend, Gurney 

and Co., the model instance of all evil in business, 

is a most alarming example of this evil. No 

cleverer men of business probably (cleverer I mean 

for the purposes of their particular calling) could 

well be found than the founders and first managers 

of that house. But in a very few years the rule in 

it passed to a generation whose folly surpassed the 

usual limit of imaginable incapacity. In a short 

time they substituted ruin for prosperity and 

changed opulence into insolvency. Such great 

folly is happily rare ; and the business of a bank is 

not nearly as difficult as the business of a discount 

company. Still much folly is common, and the 

business of a great bank requires a great deal of 

ability, and an even rarer degree of trained and 

sober judgment. That which happened so marvel- 

ously in the green tree may happen also in the 

dry. A great private bank might easily become 
12* 



274 THE PRIVATE BANKS. 

very rotten by a change from discretion to foolish- 
ness in those who conduct it. 

We have had as yet in London, happily, no 
example of this ; indeed, we have hardly as yet had 
the opportunity. Till now private banks have 
been small ; small as we now reckon banks. For 
their exigencies a moderate degree of ability and 
an anxious caution will suffice. But if the size of 
the banks is augmented and greater ability is re- 
quired, the constant difficulty of an hereditary 
government will begin to be felt. g The father 
had great brains and created the business : but the 
son had less brains and lost or lessened it/ This 
is the history of all great monarchies, and it may 
be the history of great private banks. The 
peculiarity in the case of Overend, Gurney and 
Co. — at least, one peculiarity — is that the evil was 
soon discovered. The richest partners had least 
concern in the management ; and when they found 
that incredible losses were ruining them, they 
stopped the concern and turned it into a company. 
But they had done nothing; if at least they had 
only prevented farther losses, the firm might have 
been in existence and in the highest credit now. 
It was the publicity of their losses which ruined 
them. But if they had continued to be a private 
partnership they need not have disclosed those 



THE PRIVATE BANKS. 



275 



losses : they might have written them off quietly 
out of the immense profits they could have accu- 
mulated. They had some ten millions of other 
people's money in their hands which no one thought 
of disturbing. The perturbation through the 
country which their failure caused in the end, shows 
how diffused and how unimpaired their popular 
reputation was. No one in the rural districts (as 
I know by experience) would ever believe a word 
against them, say what you might. The catas- 
trophe came because at the change the partners in 
the old private firm — the Gurney family espe- 
cially — had guaranteed the new company against 
the previous losses : those losses turned out to be 
much greater than was expected. To pay what 
was necessary the ' Gurneys ' had to sell their es- 
tates, and their visible ruin destroyed the credit 
of the concern. But if there had been no such 
guarantee, and no sale of estates, — if the great 
losses had slept a quiet sleep in a hidden ledger, 
- — no one would have been alarmed, and the credit 
and the business of ' Overends ' might have exist- 
ed till now, and their name still continued to be 
one of our first names. The difficulty of propa- 
gating a good management by inheritance for 
generations is greatest in private banks and dis- 
count firms because of their essential secrecy. 



276 



THE PRIVATE BANKS. 



The danger may indeed be surmounted by the 
continual infusion of new and able partners. The 
deterioration of the old blood may be compensated 
by the excellent quality of the fresh blood. But to 
this again there is an objection, of little value per- 
haps in seeming, but of much real influence in 
practice. The infusion of new partners requires 
from the old partners a considerable sacrifice of 
income ; the old must give up that which the new 
receive, and the old will not like this. The 
effectual remedy is so painful that I fear it often 
may be postponed too long. 

I cannot, therefore, expect with certainty the 
continuance of our system of private banking. I 
am sure that the days of small banks will before 
many years come to an end, and that the diffi- 
culties of large private banks are very important. 
In the mean time it is very important that large 
private banks should be well managed. And the 
present state of banking makes this peculiarly 
difficult. The detail of the business is augmenting 
with an overwhelming rapidity. More cheques are 
drawn year by year ; not only more absolutely, but 
more by each person, and more in proportion to 
his income. The payments in, and payments out of 
a common account are very much more numerous 
than they formerly were. And this causes an 



THE PRIVATE BANKS. 277 

enormous growth of detail. And besides, bankers 
have of late begun almost a new business. They 
now not only keep people's money, but also collect 
their incomes for them. Many persons live en- 
tirely on the income of shares, or debentures, or 
foreign bonds, which is paid in coupons, and 
these are handed in for the bank to collect. Often 
enough the debenture, or the certificate, or the 
bond is in the custody of the banker, and he is 
expected to see when the coupon is due, and to 
cut it off and transmit it for payment. And the 
detail of all this is incredible, and it needs a special 
machinery to cope with it. 

A large joint stock bank, if well-worked, has 
that machinery. It has at the head of the execu- 
tive a general manager who was tried in the detail 
of banking, who is devoted to it, and who is con- 
tent to live almost wholly in it. He thinks of little 
else, and ought to think of little else. One of his 
first duties is to form a hierarchy of inferior offi- 
cers, whose respective duties are defined, and to 
see that they can perform and do perform those 
duties. But a private bank of the type usual in 
London has no such officer. It is managed by the 
partners ; now these are generally rich men, are 
seldom able to grapple with great business of de- 
tail, and are not disposed to spend their whole 



278 THE PRIVATE BANKS. 

lives and devote their entire minds to it if they 
were able. A person with the accumulated wealth, 
the education, and the social place of a great Lon- 
don banker would be a fool so to devote himself. 
He would sacrifice a suitable and a pleasant life 
for an unpleasant and an unsuitable life. But still 
the detail must be well done ; and some one must 
be specially chosen to watch it and to preside over 
it, or it will not be well done. Until now, or until 
lately, this difficulty has not been fully felt. The 
detail of the business of a small private bank was 
moderate enough to be superintended effectually 
by the partners. But, as has been said, the detail 
of banking — the proportion of detail to the size of 
the bank — is everywhere increasing. The size of 
the private banks will have to augment if private 
banks are not to cease ; and therefore the neces- 
sity of a good organisation for detail is urgent. 
If the bank grows, and simultaneously the detail 
grows in proportion to the bank, a frightful con- 
fusion is near unless care be taken. 

The only organisation which I can imagine to 
be effectual is that which exists in the antagonistic 
establishments. The great private banks will 
have, I believe, to appoint in some form or other, 
and under some name or other, some species of 



THE PRIVATE BANKS. 



279 



general manager who will watch, contrive, and 
arrange the detail for them. The precise shape 
of the organisation is immaterial ; each bank may- 
have its own shape, but the man must be there. 
The true business of the private partners in such 
a bank is much that of the directors in a joint 
stock bank. They should form a permanent 
committee to consult with their general manager, 
to watch him, and to attend to large loans and 
points of principle. They should not themselves 
be responsible for detail ; if they do there will be 
two evils at once : the detail will be done badly, 
and the minds of those who ought to decide prin- 
cipal things will be distracted from those principal 
things. There will be a continual worry in the 
bank, and in a worry bad loans are apt to be made 
and money is apt to be lost. 

A subsidiary advantage of this organisation is 
that it would render the transition from private 
banking to joint stock banking easier, if that 
transition should be necessary. The one might 
merge in the other as convenience suggested and 
as events required. There is nothing intrusive in 
discussing this subject. The organisation of the 
private is just like that of the joint stock banks ; 
all the public are interested that it should be good. 



2 SO THE PRIVATE BANKS. 

The want of a good organisation may cause the 
failure of one or more of these banks ; and such 
failure of such banks may intensify a panic, even 
if it should not cause one. 



28l 



CHAPTER XL 

THE BILL-BROKERS. 

Under every system of banking, whether that in 
which the reserve is kept in many banks, or one 
in which it is kept in a single bank only, there 
will always be a class of persons who examine 
more carefully than busy bankers can the nature 
of different securities ; and who, by attending only 
to one class, come to be particularly well ac- 
quainted with that class. And as these specially 
qualified dealers can for the most part lend much 
more than their own capital, they will always be 
ready to borrow largely from bankers and others, 
and to deposit the securities which they know to be 
good as a pledge for the loan. They act thus as 
intermediaries between the borrowing public and 
the less qualified capitalist ; knowing better than 
the ordinary capitalist which loans are better and 
which are worse, they borrow from him, and gain 
a profit by charging to the public more than they 
pay to him. 



282 THE BILL-BROKERS. 

Many stock brokers transact such business upon 
a great scale. They lend large sums on foreign 
bonds or railway shares or other such securities, 
and borrow those sums from bankers, depositing 
the securities with the bankers, and generally, 
though not always, giving their guarantee. But 
by far the greatest of these intermediate dealers 
are the bill-brokers. Mercantile bills are an ex- 
ceedingly difficult kind of security to understand. 
The relative credit of different merchants is a 
great ' tradition ' ; it is a large mass of most valuable 
knowledge which has never been described in 
books and is probably incapable of being so 
described. The subject matter of it, too, is shift- 
ing and changing daily ; an accurate representa- 
tion of the trustworthiness of houses at the begin- 
ning of a year might easily be a most fatal represen- 
tation at the end of it. In all years there are great 
changes ; some houses rise a good deal and some 
fall. And in some particular years the changes 
are immense ; in years like 1871 many active men 
make so much money that at the end of the year 
they are worthy of altogether greater credit than 
anyone would have dreamed of giving to them at 
the beginning. On the other hand, in years like 
1866 a contagious ruin destroys the trustworthi- 
ness of very many firms and persons, and often, 



THE BILL-BROKERS. 283 

especially, of many who stood highest immediately 
before. Such years alter altogether an important 
part of the mercantile world : the final question 
of bill-brokers, ' which bills will be paid and which 
will not ? which bills are second-rate and which 
first-rate ? ' would be answered very differently at 
the beginning of the year and at the end. No one 
can be a good bill-broker who has not learnt the 
great mercantile tradition of what is called ' the 
standing of parties/ and who does not watch 
personally and incessantly the inevitable changes 
which from hour to hour impair the truth of that 
tradition. The 'credit' of a person — that is, the 
reliance which may be placed on his pecuniary 
fidelity — is a different thing from his property. 
No doubt, other things being equal, a rich man is 
more likely to pay than a poor man. But on the 
other hand, there are many men not of much 
wealth who are trusted in the market, ' as a matter 
of business/ for sums much exceeding the wealth 
of those who are many times richer. A firm or 
a person who have been long known to 'meet 
their engagements/ inspire a degree of confidence 
not dependent on the quantity of his or their pro- 
perty. Persons who buy to sell again soon are often 
liable for amounts altogether much greater than 
their own capital ; and the power of obtaining those 



284 



THE BILL-BROKERS. 



sums depends upon their % ' respectability/ their 
* standing/ and their * credit/ as the technical 
terms express it, and more simply upon the 
opinion which those who deal with them have 
formed of them. The principal mode in which 
money is raised by traders is by '■ bills of exchange ; ' 
the estimated certainty of their paying those bills 
on the day they fall due is the measure of their 
credit ; and those who estimate that liability best, 
the only persons indeed who can estimate it 
exceedingly well, are the bill-brokers. And these 
dealers, taking advantage of their peculiar knowl- 
edge, borrow immense sums from bankers and 
others ; they generally deposit the bills as a 
security ; and they generally give their own 
guarantee of the goodness of the bill : but neither 
of such practices indeed is essential, though both 
are the ordinary rule. When Overends failed, as I 
have said before, they had borrowed in this way 
very largely. There are others now in the trade 
who have borrowed quite as much. 

As is usually the case, this kind of business has 
grown up only gradually. In the year 1810 there 
was no such business precisely answering to what 
we now call bill-broking in London. Mr. Richard- 
son, the principal ' bill-broker ' of the time, as the 
term was then understood, thus described his 
business to the ' Bullion Committee : — ' 



THE BILL-BROKERS. 



2S5 



1 What is the nature of the agency for country 
banks ? — It is twofold : in the first place to pro- 
cure money for country bankers on bills when 
they have occasion to borrow on discount, which 
is not often the case ; and in the next place, to 
lend the money for the country bankers on bills on 
discount. The sums of money which I lend for 
country bankers on discount are fifty times more 
than the sums borrowed for country bankers. 

1 Do you send London bills into the country for 
discount ? — Yes. 

1 Do you receive bills from the country upon 
London in return, at a date, to be discounted ? — 
Yes, to a very considerable amount, from particular 
parts of the country. 

' Are not both sets of bills by this means under 
discount ? — No, the bills received from one part 
of the country are sent down to another part for 
discount. 

1 And they are not discounted in London ? — No. 
In some parts of the country there is but little 
circulation of bills drawn upon London, as in Nor- 
folk, Suffolk, Essex, Sussex, &c. ; but there is there 
a considerable circulation in country bank-notes, 
principally optional notes. In Lancashire there is 
little or no circulation of country bank-notes ; but 
there is a great circulation of bills drawn upon 
London at two or three months' date. I receive 



236 THE BILL-BROKERS. 

bills to a considerable amount from Lancashire in 
particular, and remit them to Norfolk, Suffolk, &c., 
where the bankers have large lodgments, and 
much surplus money to advance on bills for dis- 
count/ 

Mr. Richardson was only a broker who found 
money for bills and bills for money. He is further 
asked : 

' Do you guarantee the bills you discount, and 
what is your charge per cent. ? — No, we do not 
guarantee them ; our charge is one-eighth per 
cent, brokerage upon the bill discounted — but we 
make no charge to the lender of the money. 

1 Do you consider that brokerage as a compen- 
sation for the skill which you exercise in selecting 
the bills which you thus get discounted? — Yes, 
for selecting of the bills, writing letters, and other 
trouble. 

' Does the party who furnishes the money give 
you any kind of compensation ? — None at all. 

* Does he not consider you as his agent, and in 
some degree responsible for the safety of the bills 
which you give him ? — Not at all. 

1 Does he not prefer you on the score of his 
judging that you will give him good intelligence 
upon that subject ? — Yes, he relies upon us. 

' Do you then exercise a discretion as to the 






THE BILL-BROKERS. 287 

to us which we conceive not to be safe, we return 
it. 

' Do you not then conceive yourselves to depend 
in a great % measure for the quantity of business 
which you can perform on the favour of the party 
lending the money ? — Yes, very much so. If we 
manage our business well, we retain our friends ; 
if we do not, we lose them/ 

It was natural enough that the owners of the 
money should not pay, though the owner of the 
bill did, for in almost all ages the borrower has 
been a seeker more or less anxious; he has 
always been ready to pay for those who will find 
him the money he is in search of. But the 
possessor of money has rarely been willing to pay 
anything ; he has usually and rightly believed 
that the borrower would discover him soon. 

Notwithstanding other changes, the distribution 
of the customers of the bill-brokers in different 
parts of the country still remains much as Mr. 
Richardson described it sixty years ago. For the 
most part, agricultural counties do not employ as 
much money as they save ; manufacturing counties, 
on the other hand, can employ much more than 
they save ; and therefore the money of Norfolk 
or of Somersetshire is deposited with the London 
bill-brokers, w r ho use it to discount the bills of 
Lancashire and Yorkshire. 



283 THE BILL-BROKERS. 

The old practice of bill-broking, which Mr. 
Richardson describes, also still exists. There are 
many brokers to be seen about Lombard Street with 
bills which they wish to discount but which they 
do not guarantee. They have sometimes dis- 
counted these bills with their own capital, and if 
they can re-discount them at a slightly lower rate 
they gain a difference which at first seems but 
trifling, but with which they are quite content, 
because this system of lending first and borrowing 
again immediately enables them to turn their 
capital very frequently, and on a few thousand 
pounds of capital to discount hundreds of thou- 
sands of bills ; as the transactions are so many, 
they can be content with a smaller profit on 
each. In other cases, these non-guaranteeing 
brokers are only agents who are seeking money 
for bills which they have undertaken to get dis- 
counted. But in either case, as far as the banker 
or other ultimate capitalist is concerned, the trans- 
action is essentially that which Mr. Richardson 
describes. The loan by such banker is a re- 
discount of the bill; that banker cannot obtain 
repayment of that loan, except by the payment of 
the bill at maturity. He has no claim upon the 
agent who brought him the bill. Bill-broking, in 
this which we may call its archaic form, is simply 



THE BILL-BROKERS. 



289 



one of the modes in which bankers obtain bills 
which are acceptable to them and which they re- 
discount. No reference is made in it to the credit 
of the bill-broker ; the bills being discounted 'with- 
out recourse ' to him are as good if taken from a 
pauper as if taken from a millionaire. The lender 
exercises his own judgment on the goodness of the 
bill. 

But in modern bill-broking the credit of the bill- 
broker is a vital element. The lender considers 
that the bill-broker — no matter whether an indi- 
vidual, a company, or a firm — has considerable 
wealth, and he takes the 'bills/ relying that the 
broker would not venture that wealth by guaran- 
teeing them unless he thought them good. The 
lender thinks, too, that the bill-broker being daily 
conversant with bills and bills only, knows probably 
all about bills : he lends partly in reliance on the 
wealth of the broker and partly in reliance 
on his skill. He does not exercise much judg- 
ment of his own on the bills deposited with 
him : he often does not watch them very closely. 
Probably not one-thousandth part of the creditors 
on security of Overend, Gurney and Co., had 
ever expected to have to rely on that security, 
or had ever given much real attention to it. 
Sometimes, indeed, the confidence in the bill- 

13 



290 THE BILL-BROKERS. 

brokers goes farther. A considerable number of 
persons lend to them, not only without much 
looking at the security but even without taking 
any security. This is the exact reverse of the 
practice which Mr. Richardson described in 1810; 
then the lender relied wholly on the goodness of 
the bill, now, in these particular cases, he relies 
solely on the bill-broker, and does not take a bill 
in any shape. Nothing can be more natural or 
more inevitable than this change. It was certain 
that the bill-broker, being supposed to understand 
bills well, would be asked by the lenders to evince 
his reliance on the bills he offered by giving a 
guarantee for them. It was also most natural 
that the bill-brokers, having by the constant 
practice of this lucrative trade obtained high 
standing and acquired great wealth, should become, 
more or less, bankers too, and should receive 
money on deposit without giving any security for it. 
But the effects of the change have been very 
remarkable. In the practice as Mr. Richardson 
described it, there is no peculiarity very likely to 
affect the money market. The bill-broker brought 
bills to the banker, just as others brought them ; 
nothing at all could be said as to it except that the 
Bank must not discount bad bills, must not discount 
too many bills, and must keep a good reserve. 



THE BILL-BROKERS. 29I 

But the modern practice introduces more complex 
considerations. In the trade of bill-broking, as it 
now exists, there is one great difficulty ; the bill- 
broker has to pay interest for all the money which 
he receives. How this arose we have just seen. 
The present lender to the bill-broker at first always 
used to discount a bill, which is as much as saying 
that he was always a lender at interest. When he 
came to take the guarantee of the broker, and 
only to look at the bills as a collateral security, 
naturally he did not forego his interest : still less 
did he forego it when he ceased to take security 
at all. The bill-broker has, in one shape or other, 
to pay interest on every sixpence left with him, 
and that constant habit of giving interest has this 
grave consequence: — the bill-broker cannot afford 
to keep much money unemployed. He has become 
a banker owing large sums which he may be 
called on to repay, but he cannot hold as much as 
an ordinary banker, or nearly as much, of such 
sums in cash, because the loss of interest would 
ruin him. Competition reduces the rate which the 
bill-broker can charge, and raises the rate which 
the bill-broker must give, so that he has to live 
on a difference exceedingly narrow. And if he 
constantly kept a large hoard of barren money he 
would soon be found in the ' Gazette/ 



292 THE BILL-BROKERS. 

The difficulty is aggravated by the terms upon 
which a great part of the money at the bill-brokers 
is deposited with them. Very much of it is re- 
payable at demand, or at very short notice. 
The demands on a broker in periods of alarm may 
consequently be very great, and in practice they 
often are so. In times of panic there is always 
a very heavy call, if not a run upon them ; and in 
consequence of the essential nature of their 
business, they cannot constantly keep a large 
unemployed reserve of their own in actual cash, 
they are obliged to ask help of some one who 
possesses that cash. By the conditions of his 
trade, the bill-broker is forced to belong to a class 
of ' dependent money-dealers/ as we may term 
them, that is, of dealers who do not keep their 
own reserve, and must, therefore, at every crisis 
of great difficulty revert to others. 

In a natural state of banking, that in which all 
the principal banks kept their own reserve, this 
demand of the bill-brokers and other dependent 
dealers would be one of the principal calls on that 
reserve. At every period of incipient panic the 
holders of it would perceive that it was of great 
importance to themselves to support these de- 
pendent dealers. If the panic destroyed those 
dealers it would grow by what it fed upon (as is 



THE BILL-BROKERS. 



293 



its nature), and might probably destroy also the 
bankers, the holders of the reserve. The public 
terror at such times is indiscriminate. When one 
house of good credit has perished, other houses 
of equal credit though of different nature are in 
danger of perishing. The many holders of the 
banking reserve would under the natural system 
of banking be obliged to advance out of that re- 
serve to uphold bill-brokers and similar dealers. 
It would be essential to their own preservation 
not to let such dealers fail, and the protection of 
such dealers would therefore be reckoned among 
the necessary purposes for which they retained 
that reserve. 

Nor probably would the demands on the bill- 
brokers in such a system of banking be exceed- 
ingly formidable. Considerable sums would no 
doubt be drawn from them, but there would be 
no special reason why money should be de- 
manded from them more than from any other 
money dealers. They would share the panic with 
the bankers who kept the reserve, but they would 
not feel it more than the bankers. In each 
crisis the set of the storm would be determined 
by the cause which had excited it, but there would 
not be anything in the nature of bill-broking to 
attract the advance of the alarm peculiarly to them. 



294 T P E BILL-BROKERS, 

They would not be more likely to suffer than 
other persons ; the only difference would be that 
when they did suffer, having no adequate reserve 
of their own, they would be obliged to ask the aid 
of others. 

But under a #;z£-reserve system of banking, the 
position of the bill-brokers is much more singular 
and much more precarious. In fact, in Lombard 
Street, the principal depositors of the bill-brokers 
are the bankers, whether of London, or of provin- 
cial England, or of Scotland, or Ireland. Such 
deposits are, in fact, a portion of the reserve of 
these bankers ; they make an essential part of the 
sums which they have provided and laid by against 
a panic. Accordingly, in every panic these sums 
are sure to be called in from the bill-brokers ; they 
were wanted to be used by their owners in time 
of panic, and in time of panic they ask for them. 
' Perhaps it may be interesting/ said Alderman 
Salomons, speaking on behalf of the London and 
Westminster Bank, after the panic 0^1857, to the 
committee, 'to know that, on November 11, we 
held discounted bills for brokers to the amount 
of 5,623,000/. Out of these bills 2,800,000/. ma- 
tured between November 1 1 and December 4 ; 
2,000,000/. more between December 11 and 
December 31 ; consequently we were prepared 



THE BILL-BROKERS. 2 g$ 

merely by the maturing of our bills of exchange 
for any demand that might come upon us/ This 
is not indeed a direct withdrawal of money on 
deposit, but its principal effect is identical. At 
the beginning of the time the London and West- 
minster Bank had lent 5,000,000/. more to the 
bill-brokers than they had at the end of it ; and 
that 5,000,000/. the bank had added to its reserve 
against a time of difficulty. 

The intensity of the demand on the bill-broker 
is aggravated therefore by our peculiar system of 
banking. Just at the moment when, by the 
nature of their business, they have to resort to the 
reserves of bankers for necessary support, the 
bankers remove from them large sums in order to 
strengthen those reserves. A great additional 
strain is thrown upon them just at the moment 
when they are least able to bear it ; and it is thrown 
, by those who under a natural system of banking 
would not aggravate the pressure on the bill- 
brokers, but relieve it. 

And the profits of bill-broking are propor- 
tionably raised. The reserves of the bankers 
so deposited with the bill-broker form a most 
profitable part of his business ; they are on the 
whole of very large amount, and at all times, ex- 
cept those of panic, may well be depended upon. 



296 THE BILL-BROKERS. 

The bankers are pretty sure to keep them there, 
just because they must keep a reserve, and they 
consider it one of the best places in which to 
keep it. Under a more natural system, no part 
of the banking reserve would ever be lodged at 
the brokers. Bankers would deposit with the 
brokers only their extra money, the money which 
they considered they could safely lend, and which 
they would not require during a panic. In the 
eye of the banker, money at the brokers would 
then be one of the investments of cash, it 
would not be a part of such cash. The deposits 
of bill-brokers and the profits of bill-broking are 
increased by our present system, just in propor- 
tion as the dangers of bill-brokers during a panic 
are increased by it. 

The strain, too, on our banking reserve which 
is caused by the demands of the bill-brokers, is 
also more dangerous than it would be under a 
natural system, because that reserve is in itself 
less. The system of keeping the entire ultimate 
reserve at a single bank, undoubtedly diminishes 
the amount of reserve which is kept. And exactly 
on that very account the danger of any particular 
demand on that reserve is augmented, because the 
magnitude of the fund upon which that de- 
mand falls is diminished. So that our one-reserve 



THE BILL-BROKERS. 



297 



system of banking combines two evils : first, it 
makes the demand of the brokers upon the final 
reserve greater, because under it so many bankers 
remove so much money from the brokers ; and 
under it also the final reserve is reduced to its 
minimum point, and the entire system of. credit 
is made more delicate, and more sensitive. 

The peculiarity, indeed, of the effects of the 
one reserve is indeed even greater in this respect. 
Under the natural system, the bill-brokers would 
be in no respect the rivals of the bankers which 
kept the ultimate reserve. They would be rather 
the agents for these bankers in lending upon cer- 
tain securities which they did not themselves like, 
or on which they did not feel competent to lend 
safely. The bankers who in time of panic had to 
help them would in ordinary times derive much 
advantage from them. But under our present sys- 
tem all this is reversed. The Bank of England 
never deposits any money with the bill-brokers ; 
in ordinary times it never derives any advantage 
from them. On the other hand, as the Bank 
carries on itself a large discount business, as it 
considers that it is itself competent to lend on all 
kinds of bills, the bill-brokers are its most 
formidable rivals. As they constantly give high 
rates for money it is necessary that they should 



298 THE BILL-BROKERS.. 

undersell the Bank, and in ordinary times they do 
undersell it. But as the Bank of England alone 
keeps the final banking reserve, the bill-brokers 
of necessity have to resort to that final reserve ; 
so that at every panic, and by the essential consti- 
tution of the money market, the Bank of England 
has to help, has to maintain in existence, the 
dealers, who never in return help the Bank at 
any time, but who are in ordinary times its closest 
competitors and its keenest rivals. 

It might be expected that such a state of things 
would cause much discontent at the Bank of 
England, and in matter of fact there has been 
much discussion about it, and much objection 
taken to it. After the panic of 1857, this was so 
especially. During that panic, the Bank of 
England advanced to the bill-brokers more than 
9,000,000/., though their advances to bankers, 
whether London or country, were only 8,000,000/. ; 
and, not unnaturally, the Bank thought it un- 
reasonable that so large an inroad upon their 
resources should be made by their rivals. In 
consequence, in 1858 they made a rule that they 
would only advance to the bill-brokers at certain 
seasons of the year, when the public money is 
particularly large at the bank, and that at 
other times any application for an advance should 



THE BILL-BROKERS. 



299 



be considered exceptional, and dealt with accord- 
ingly. And the object of that regulation was 
officially stated to be ' to make them keep their 
own reserve, and not to be dependent on the 
Bank of England/ As might be supposed, this 
rule was exceedingly unpopular with the brokers, 
and the greatest of them, Overend, Gurney and 
Co., resolved on a strange policy in the hope of 
abolishing it. They thought they could frighten 
the Bank of England, and could show that if 
they were dependent on it, it was also depen- 
dent on them. They accordingly accumulated 
a large deposit at the Bank to the amount 
of 3,000,000/., and then withdrew it all at once. 
But this policy had no effect, except that of ex- 
citing a distrust of ' Overends ' : the credit of 
the Bank of England was not diminished ; 
Overends had to return the money in a few days, 
and had the dissatisfaction of feeling that they 
had in vain attempted to assail the solid basis of 
everyone's credit, and that everyone disliked them 
for doing so. But though this ill-conceived 
attempt failed as it deserved, the rule itself could 
not be maintained. The Bank does, in fact, at 
every period of pressure, advance to the bill- 
brokers ; the case may be considered ' excep- 
tional/ but the advance is always made if the 



300 THE BILL-BROKERS. 

security offered is really good. However much 
the Bank may dislike to aid their rivals, yet they 
must aid them ; at a crisis they feel that they 
would only be aggravating incipient demand, and 
be augmenting the probable pressure on them- 
selves if they refused to do so. 

I shall be asked if this anomaly is inevitable, 
and I am afraid that for practical purposes 
we must consider it to be so. It may be 
lessened ; the bill-brokers may, and should, 
discourage as much as they can the deposit of 
money with them on demand, and encourage the 
deposit of it at distant fixed dates or long notice. 
This will diminish the anomaly, but it will not 
cure it. Practically, bill-brokers cannot refuse to 
receive money at call. In every market a dealer 
must conduct his business according to the 
custom of the market, or he will not be able to 
conduct it at all. All the bill-brokers can do is 
to offer better rates for more permanent money, 
and this (though possibly not so much as might 
be Avished) they do at present. In its essence, this 
anomaly is, I believe, an inevitable part of the 
system of banking which history has given us, 
and which we have only to make the best of, since 
we cannot alter it. 



30i 



CHAPTER XII. 

THE PRINCIPLES WHICH SHOULD REGULATE THE 
AMOUNT OF THE J3ANKING RESERVE TO BE KEPT 
BY THE BANK OF ENGLAND. 

There is a very common notion that the amount 
of the reserve which the Bank of England ought 
to keep can be determined at once from the face 
of their weekly balance sheet. It is imagined 
that you have only to take the liabilities of the 
Banking department, and that a third or some 
other fixed proportion will in all cases be the 
amount of reserve which the Bank should keep 
against those liabilities. But to this there are 
several objections, some arising from the general 
nature of the banking trade, and others from the 
special position of the Bank of England. 

That the amount of the liabilities of a bank 
is a principal element in determining the proper 
amount of its reserve is plainly true ; but that it 
is the only element by which that amount is 



302 



THE PRINCIPLES WHICH SHOULD REGULATE 



determined is plainly false. The intrinsic nature 
of these liabilities must be considered, as well 
as their numerical quantity. For example, no 
one would say that the same amount of reserve 
ought to be kept against acceptances which can- 
not be paid except at a certain day, and against 
deposits at call, which may be demanded at 
any moment. m If a bank groups these liabilities 
together in the balance-sheet, you cannot tell the 
amount of reserve it ought to keep. The neces- 
sary information is not given you. 

Nor can you certainly determine the amount of 
reserve necessary to be kept against deposits 
unless you know something as to the nature of 
these deposits. If out of 3,000,000/. of money, 
one depositor has 1,000,000/. to his credit, and 
may draw it out when he pleases, a much larger 
reserve will be necessary against that liability of 
1,000,000/. than against the remaining 2,000,000/. 
The intensity of the liability, so to say, is much 
greater ; and therefore the provision in store 
must be much greater also. On the other hand, 
supposing that this single depositor is one of cal- 
culable habits — suppose that it is a public body, 
the time of whose demands is known, and the 
time of whose receipts is known also — this single 
liability requires a less reserve than that of an 



THE AMOUNT OF THE BANK'S RESERVE. 



303 



equal amount of ordinary liabilities. The danger 
that it will be called for is much less ; and there- 
fore the security taken against it may be much less 
too. Unless the quality of the liabilities is con- 
sidered as well as their quantity, the due provision 
for their payment cannot be determined. 

These are general truths as to all banks, and 
they have a very particular application to the 
Bank of England. The first application is fa- 
vourable to the Bank ; for it shows the danger 
of one of the principal liabilities to be much 
smaller than it seems. The largest account at 
the Bank of England is that of the English 
Government ; and probably there has never been 
any account of which it was so easy in time of 
peace to calculate the course. All the material 
facts relative to the English revenue, and the 
English expenditure, are exceedingly well known ; 
and the amount of the coming payments to and 
from this account are always, except in war 
times, to be calculated with wonderful accuracy. In 
war, no doubt, this is all reversed ; the account of 
a government at war is probably the most un- 
certain of all accounts, especially of a government 
of a scattered empire, like the English, whose 
places of outlay in time of war are so many and 
so distant, and the amount of whose payments is 



304 



THE PRINCIPLES WHICH SHOULD REGULATE 



therefore so incalculable. Ordinarily, however, 
there is no account of which the course can 
be so easily predicted ; and therefore no ac- 
count which needs in ordinary times so little 
reserve. The principal payments, when they 
are made, are also of the most satisfactory 
kind to a banker; they are, to a great extent, 
made to another account at his bank. These 
largest ordinary payments of the Government are 
the dividends on the debt, and these are mostly 
made to bankers who act as agents for the 
creditors of the nation. The payment of the 
dividends for the Government is, therefore, in 
great part a transfer from the account of the Gov- 
ernment to the accounts of the various bankers. 
A certain amount no doubt goes almost at once 
to the non-banking classes ; to those who keep 
coin and notes in house, and have no account at 
any bank. But even this amount is calculable, 
for it is always nearly the same. And the entire 
operation is, to those who can watch it, singularly 
invariable time after time. 

But it is important to observe, that the published 
accounts of the Bank give no such information to 
the public as will enable them to make their own 
calculations. The account of which we have been 
speaking is the yearly account of the English 



THE AMOUNT OF THE BANK'S RESERVE. 



305 



Government — what we mav call the Budget 
account, that of revenue and expenditure. And 
the laws of this are, as we have shown, already 
known. But under the head 'Public Deposits' in 
the accounts of the Bank, are contained also other 
accounts, and particularly that of the Secretary for 
India in Council, the laws of which must be 
different and are quite unknown. The Secretary 
for India is a large lender on its account. If any 
one proposed to give such power to the 
Chancellor of the Exchequer, there would be great 
fear and outcry. But so much depends on habit 
and tradition, that the India Office on one side of 
Downing Street can do without remark, and with 
universal assent, what it w r ould be thought 
' unsound ' and extravagant to propose that the 
other side should do. The present India Office 
inherits this independence from the old Board of 
the Company, which, being mercantile and busi- 
ness-like, used to lend its own money on the 
Stock Exchange as it pleased ; the Council of 
India, its successor, retains the power. Nothing 
can be better than that it should be allowed 
to do as it likes ; but the mixing up the account 
of a body which has such a power, and which 
draws money from India, with that of the Home 
government clearly prevents the general public 



306 THE PRINCIPLES WHICH SHOULD REGULATE 

from being able to draw inferences as to the 
course of the combined account from its knowledge 
of home finance only. The account of ' public 
deposits ' in the Bank return includes other 
accounts too, as the Savings' Bank balance, the 
Chancery Funds account, and others ; and in 
consequence, till lately the public had but little 
knowledge of the real changes of the account of 
our Government, properly so called. But Mr, 
Lowe has lately given us a weekly account, and 
from this, and not from the Bank account, we are 
able to form a judgment. This account and the 
return of the Bank of England, it is true, un- 
happily appear on different days ; but except for 
that accident our knowledge would be perfect ; 
and as it is, for almost all purposes what we know 
is reasonably sufficient. We can now calculate 
the course of the Government account nearly as 
well as it is possible to calculate it. 

So far, as we have said, an analysis of the return 
of the Bank of England is very favourable to the 
Bank. So great a reserve need not usually be 
kept against the Government account as if it were 
a common account. We know the laws of 
its changes peculiarly well : we can tell when its 
principal changes will happen with great accuracy ; 
and we know that at such changes most of what 



THE AMOUNT OF THE BANK'S RESERVE. 307 

is paid away by the Government is only paid to 
other depositors at the Bank, and that it will 
really stay at the Bank, though under another 
name. If we look to the private deposits of the 
Bank of England, at first sight we may think that 
the result is the same. By far the most important 
of these are the ' Bankers' deposits' ; and, for the 
most part, these deposits as a whole are likely to 
vary very little. Each banker, we will suppose, 
keeps as little as he can, but in all domestic trans- 
actions payment from one is really payment to the 
other. All the most important transactions in 
the country are settled by cheques ; these cheques 
are paid in to the ' clearing-house/ and the 
balances resulting from them are settled by 
transfers from the account of one banker to another 
at the Bank of England. Payments out of the 
bankers' balances, therefore, correspond with 
payments in. As a whole, the deposit of the 
bankers' balances at the Bank of England would 
at first sight seem to be a deposit singularly 
stable. 

Indeed, they would seem, so to say, to be 
better than stable. They augment when every- 
thing else tends to diminish. At a panic, when 
all other deposits are likely to be taken away, the 
bankers' deposits, augment ; in fact they did so 



3 o8 THE PRINCIPLES WHICH SHOULD REGULATE 

in i*866, though we do not know the particulars ; 
and it is natural that they should so increase. 
At such moments all bankers are extremely anxious, 
and they try to strengthen themselves by every 
means in their power ; they try to have as much 
money as it is possible at command ; they augment 
their reserve as much as they can, and they place 
that reserve at the Bank of England. A deposit 
which is not likely to vary in ordinary times, and 
which is likely to augment in times of danger, 
seems, in some sort, the model of a deposit. It 
might seem not only that a large proportion of it 
might be lent, but that the whole of it might be so. 
But a further analysis will, as I believe, show that 
this conclusion is entirely false ; that the bankers' 
deposits are a singularly treacherous form of 
liability ; that the utmost caution ought to be used 
in dealing with them ; that, as a rule, a less propor- 
tion of them ought to be lent than of ordinary 
deposits. 

The easiest mode of explaining anything is, 
usually, to exemplify it by a single actual case. 
And in this subject, fortunately, there is a most 
conspicuous case near at hand. The German 
Government has lately taken large sums in bullion 
from this country, in part from the Bank of 
England, and in part not, according as it chose. 



THE AMOUNT OF THE BANK'S RESERVE. 309 

It was in the main well advised, and considerate 
in its action ; and did not take nearly as much 
from the Bank as it might, or as would have 
been dangerous. Still it took large sums from 
the Bank ; and it might easily have taken more. 
How then did the German Government obtain 
this vast power over the Bank ? The answer is, 
that it obtained it by means of the bankers' 
balances, and that it did so in two ways. 

First, the German Government had a large 
balance of its own lying at a particular Joint Stock 
Bank. That bank lent this balance at its own 
discretion, to bill-brokers or others, and it formed 
a single item in the general funds of the London 
market. There was nothing special about it, ex- 
cept that it belonged to a foreign government, and 
that its owner was always likely to call it in, and 
sometimes did so. As long as it stayed unlent in 
the London Joint Stock Bank, it increased the 
balances of that bank at the Bank of England ; 
but so soon as it was lent, say, to a bill-broker, it 
increased the bill-broker's balance; and as soon as 
it was employed by the bill-broker in the discount 
of bills, the owners of those bills paid it to their 
credit at their separate banks, and it augmented the 
balances of those bankers at the Bank of England. 
Of course if it were employed in the discount of 



^IqTITE PRINCIPLES WHICH SHOULD REGULATE 

bills belonging to foreigners, the money might be 
taken abroad, and by similar operations it might 
also be transferred to the English provinces or to 
Scotland. But, as a rule, such money when de 
posited in London, for a considerable time remains 
in London ; and so long as it does so, it swells the 
aggregate balances of the body of bankers at the 
Bank of England. It is now in the balance of 
one bank, now of another, but it is always dis- 
persed about those balances somewhere. The 
evident consequence is that this part of the 
bankers' balances is at the mercy of the German 
Government when it chooses to apply for it. 
Supposing, then, the sum to be three or four 
millions — -and I believe that on more than one 
occasion in the last year or two it has been quite 
as much, if not more — that sum might at once be 
withdrawn from the Bank of England. In this 
case the Bank of England is in the position of 
a banker who is liable for a large amount to a 
single customer, but with this addition, that it is 
liable for an unknown amount. The German 
Government, as is well known, keeps its account 
(and a very valuable one it must be) at the 
London Joint Stock Bank ; but the Bank of 
England has no access to the account of the 
German Government at that bank; they cannot 



THE AMOUNT OF THE BANK'S RESERVE. 



3" 



tell how much German money is lying to the 
credit there. Nor can the Bank of England 
infer much from the balance of the London 
Joint Stock Bank in their Bank, for the German 
money was probably paid in various sums to that 
bank, and lent out again in other various sums. 
It might to some extent augment that bank's 
balance at the Bank of England, or it might not, 
but it certainly would not be so much added to 
that balance; and inspection of that bank's 
balance would not enable the Bank of England 
to determine even in the vaguest manner what the 
entire sum was for which it might be asked at 
any moment. Nor would the inspection of the 
bankers' balances as a whole lead to any certain 
and sure conclusions. Something might be inferred 
from them, but not anything certain. Those 
balances are no doubt in a state of constant 
fluctuation ; and very possibly during the time that 
the German money was coming in some other 
might be going out. Any sudden increase in the 
bankers' balances would be a probable indication 
of new foreign money, but new foreign money 
might come in without causing an increase, since 
some other and contemporaneous cause might 
effect a counteracting decrease. 

This is the first, and the plainest way in which 



312 THE PRINCIPLES WHICH SHOULD REGULATE 

the German Government could take, and did take, 
money from this country ; and in which it might 
have broken the Bank of England if it had liked. 
The German Government had money here and 
took it away, which is very easy to understand. 
But the Government also possessed a far greater 
power, of a somewhat more complex kind. It 
was the owner of many debts from England. A 
large part of the ' indemnity ' was paid by France 
to Germany in bills on England, and the German 
Government, as those bills became due, acquired an 
unprecedented command over the market. As each 
bill arrived at maturity, the German Government 
could, if it chose, take the proceeds abroad ; and it 
could do so in bullion, as for coinage purposes it 
wanted bullion. This would at first naturally cause 
a reduction in the bankers' balances ; at least that 
would be its tendency. Supposing the German Go- 
vernment to hold bill A, a good bill, the banker 
at whose bank bill A was payable would have to 
pay it ; and that would reduce his balance ; and as 
the sum so paid would go to Germany, it would 
not appear to the credit of any other banker: the 
aggregate of the bankers' balances would thus be 
reduced. But this reduction would not be perma- 
nent. A banker who has to pay 100,000/. cannot 
afford to reduce his balance at the Bank of 



THE AMOUNT OF THE BANK'S RESERVE. 



313 



England 100,000/. ; suppose that his liabilities 
are 2,000,000/., and that as a rule he finds it 
necessary to keep at the Bank one-tenth of these 
liabilities, or 200,000/., the payment of 100,000/. 
would reduce his reserve to 100,000/. ; but his 
liabilities would be still 1,900,000/., and therefore 
to keep up his tenth he would have 90,000/. to find. 
His process for finding it is this : he calls in, say, a 
loan to the bill-brokers ; and if no equal additional 
money is contemporaneously carried to these 
brokers (which in the case of a large withdrawal 
of foreign money is not probable), they must 
reduce their business and discount less. But the 
effect of this is to throw additional business on 
the Bank of England. They hold the ultimate 
reserve of the country, and they must discount out 
of it if no one else will : if they declined to do so 
there would be panic and collapse. As soon, 
therefore, as the withdrawal of the German money 
reduces the bankers' balances, there is a new 
demand on the Bank for fresh discounts to make 
up those balances. The drain on the Bank is two- 
fold : first, the banking reserve is reduced by ex- 
portation of the German money, which reduces 
the means of the Bank of England ; and then out 
of those reduced means the Bank of England has 
to make greater advances. 

14 



314 



THE PRINCIPLES WHICH SHOULD REGULATE 



The same result may be arrived at more 
easily. Supposing any foreign Government or 
person to have any sort of securities which he can 
pledge in the market, that operation gives it, 
or him, a credit on some banker, and enables it, 
or him, to take money from the banking reserve 
at the Bank of England, and from the bankers' 
balances ; and to replace the bankers' balances at 
their inevitable minimum, the Bank of England 
must lend. Every sudden demand on the country 
causes, in proportion to its magnitude, this 
peculiar effect. And this is the reason why the 
Bank of England ought, I think, to deal most cau- 
tiously and delicately with their banking deposits. 
They are the symbol of an indefinite liability : by 
means of them, as we see, an amount of money so 
great that it is impossible to assign a limit to it 
might be abstracted from the Bank of England. 
As the Bank of England lends money to keep up 
the bankers' balances, at their usual amount, and 
as by means of that usual amount whatever sum 
foreigners can get credit for may be taken from 
us, it is not possible to assign a superior limit (to 
use the scientific word) to the demands which by 
means of the bankers' balances may be made upon 
the Bank of England. 

The result comes round to the simple point, on 



THE AMOUNT OF THE BANK'S RESERVE. 



315 



which this book is a commentary : the Bank of 
England, by the effect of a long history, holds the 
ultimate cash reserve of the country ; whatever 
cash the country has to pay comes out of that 
reserve, and therefore the Bank of England has to 
pay it. And it is as the Bankers' Bank that the 
Bank of England has to pay it, for it is by being so 
that it becomes the keeper of the final cash reserve. 
Some persons have been so much impressed 
with such considerations as these, that they have 
contended that the Bank of England ought never to 
lend the ' bankers' balances ' at all, that they ought 
to keep them intact, and as an unused deposit. I 
am not sure, indeed, that I have seen that extreme 
form of the opinion in print, but I have often 
heard it in Lombard Street, from persons very 
influential and very qualified to judge ; even in 
print I have seen close approximations to it. But 
I am satisfied that the laying down such a ' hard 
and fast ' rule would be very dangerous ; in very 
important and very changeable business rigid rules 
are apt to be often dangerous. In a panic, as has 
been said, the bankers' balances greatly augment. It 
is true the Bank of England has to lend the money 
by which they are filled. The banker calls in his 
money from the bill-broker, ceases to re-discount 
for that broker, or borrows on securities, or sells 



7 to THE PRINCIPLES WHICH SHOULD REGULATE 

securities ; and in one or other of these ways he 
causes a new demand for money which can only 
at such times be met from the Bank of England. 
Every one else is in want too. But without in- 
quiring into the origin of the increase at panics, the 
amount of the bankers' deposits in fact increases 
very rapidly ; an immense amount of unused money 
is at such moments often poured by them into the 
Bank of England. And nothing can more surely 
aggravate the panic than to forbid the Bank of 
England to lend that money. Just when money is 
most scarce you happen to have an unusually large 
fund of this particular species of money, and you . 
should lend it as fast as you can at such moments, 
for it is ready lending which cures panics, and 
non-lending or niggardly lending which aggravates 
them. 

At other times, particularly at the quarterly 
payment of the dividends, an absolute rule which 
laid down that the bankers' balances were never 
to be lent, would be productive of great inconveni- 
ence. A large sum is just then paid from the 
Government balance to the bankers' balances, and 
if you permitted the Bank to lend it while it was 
still in the hands of the Government, but forbad 
them to lend it when it came into the hands of the 
bankers, a great tilt upwards in the value of money 



THE AMOUNT OF THE BANK'S RESERVE. 3x7 

would be the consequence, for a most important 
amount of it would suddenly have become ineffec- 
tive. 

But the idea that the bankers' balances ought 
never to be lent is only a natural aggravation of 
the truth that these balances ought to be used 
with extreme caution ; that as they entail a liability 
peculiarly great and singularly difficult to foresee, 
they ought never to be used like a common 
deposit. 

It follows from what has been said that there 
are always possible and very heavy demands on 
the Bank of England which are not shown in the 
account of the Banking department at all : these 
demands may be greatest when the liabilities shown 
by that account are smallest, and lowest when 
those liabilities are largest. If, for example, the 
German Government brings bills or other good 
securities to this market, obtains money with them, 
and removes that money from the market in bullion, 
that money may, if the German Government 
choose, be taken wholly from the Bank of England. 
If the wants of the German Government be urgent, 
and if the amount of gold ' arrivals/ that is, the 
gold coming here from the mining countries, be 
but small, that. gold will be taken from the Bank 
of England, for there is no other large store in the 



3i8 THE PRINCIPLES WHICH SHOULD REGULATE 

country. The German Government is only a con- 
spicuous example of a foreign power which happens 
lately to have had an unusual command of good 
securities, and an unusually continuous wish to 
use them in England. Any foreign state here- 
after which wants cash will be likely to come here 
for it; so long as the Bank of France should con- 
tinue not to pay in specie, a foreign state which 
wants it must of necessity come to London for it. 
And no indication of the likelihood or unlikelihood 
of that want can be found in the books of the 
Bank of England. 

What is almost a revolution in the policy of the 
Bank of England necessarily follows : no certain 
or fixed proportion of its liabilities can in the 
present times be laid down as that which the Bank 
ought to keep in reserve. The old notion that 
one-third, or any other such fraction, is in all 
cases enough, must be abandoned. The probable 
demands upon the Bank are so various in amount, 
and so little disclosed by the figures of the ac- 
count, that no simple and easy calculation is a 
sufficient guide. A definite proportion of the 
liabilities might often be too small for the reserve, 
and sometimes too great. The forces of the 
enemy being variable, those of the defence cannot 
always be the same. 



THE AMOUNT OF THE BANK'S RESERVE. 



319 



I admit that this conclusion is very inconvenient. 
In past times it has been a great aid to the Bank 
and to the public to be able to decide on the 
proper policy of the Bank from a mere inspection 
of its account. In that way the Bank knew easily 
what to do and the public knew easily what to fore- 
see. But, unhappily, the rule which is most simple 
is not always the rule which is most to be relied 
upon. The practical difficulties of life often 
cannot be met by very simple rules ; those dangers 
being complex and many, the rules for encoun- 
tering them cannot well be- single or simple. A 
uniform remedy for many diseases often ends by 
killing the patient. 

Another simple rule often laid down for the 
management of the Bank of England must now 
be abandoned also. It has been said that the Bank 
of England should look to the market rate, and 
make its own rate conform to that. This rule 
was, indeed, always erroneous. The first duty of 
the Bank of England was to protect the ultimate 
cash of the country, and to raise the rate of interest 
so as to protect it. But this rule was never so 
erroneous as now, because the number of sudden 
demands upon that reserve was never formerly 
so great. The market rate of Lombard Street is 
not influenced by those demands. That rate is 



320 



THE PRINCIPLES WHICH SHOULD REGULATE 



determined by the amount of deposits in the 
hands of bill-brokers and bankers, and the amount 
of good bills and acceptable securities offered at the 
moment. The probable efflux of bullion from 
the Bank scarcely affects it at all ; even the real 
efflux affects it but little ; if the open market did 
not believe that the Bank rate would be altered 
in consequence of such effluxes the market rate 
would not rise. If the Bank choose to let its 
bullion go unheeded, and is seen to be going so 
to choose, the value of money in Lombard Street 
will remain unaltered. The more numerous the 
demands on the Bank for bullion, and the more 
variable their magnitude, the more dangerous is 
the rule that the Bank rate of discount should 
conform to the market rate. In former quiet 
times the influence, or the partial influence, of 
that rule has often produced grave disasters. In 
the present difficult times an adherence to it is a 
recipe for making a large number of panics. 

A more distinct view of abstract principle must 
be taken before we can fix on the amount of the 
reserve which the Bank of England ought to 
keep. Why should a bank keep any reserve ? 
Because it may be called on to pay certain 
liabilities at once and in a moment. Why does 
any bank publish an account ? In order to 



THE AMOUNT OF THE BANK'S RESERVE, 321 

satisfy the public that it possesses cash — or avail- 
able securities — enough to meet its liabilities. 
The object of publishing the account of the banking 
department of the Bank of England is to let the 
nation see how the national reserve of cash stands, 
to assure the public that there is enough and more 
than enough to meet not only all probable calls, 
but all calls of which there can be a chance of 
reasonable apprehension. And there is no doubt 
that the publication of the Bank account gives 
more stability to the money market than any 
other kind of precaution would give. Some 
persons, indeed, feared that the opposite result 
would happen ; they feared that the constant 
publication of the incessant changes in the reserve 
would terrify and harass the public mind. An 
old banker once told me : ' Sir, I was on Lord 
Althorp's committee which decided on the publi- 
cation of the Bank account, and I voted against 
it. I thought it would frighten people. But I 
am bound to own that the committee was right 
and I was wrong, for that publication has given 
the money market a greater sense of security than 
anything else which has happened in my time/ 
The diffusion of confidence through Lombard 

Street and the world is the object of the publi- 
14* 



322 THE PRINCIPLES WHICH SHOULD REGULATE 

cation of the Bank accounts and of the Bank 
reserve. 

But that object is not attained if the amount of 
that reserve when so published is not enough to 
tranquillise people. A panic is sure to be caused 
if that reserve is, from whatever cause, exceedingly 
low. At every moment there is a certain mini- 
mum which I will call the 'apprehension mini- 
mum/ below which the reserve cannot fall without 
great risk of diffused fear ; and by this I do not 
mean absolute panic, but only a vague fright and 
timorousness which spreads itself instantly, and 
as if by magic, over the public mind. Such 
seasons of incipient alarm are exceedingly 
dangerous, because they beget the calamities they 
dread. What is most feared at such moments of 
susceptibility is the destruction of credit; and if 
any grave failure or bad event happens at such 
moments, the public fancy seizes on it, there is a 
general run, and credit is suspended. The Bank 
reserve then never ought to be diminished below 
the ' apprehension point.' And this is as much as 
to say, that it never ought very closely to approach 
that point; since, if it gets very near, some accident 
may easily bring it down to that point and cause 
the evil that is feared. 

There is no ' royal road ' to the amount of the 



THE. AMOUNT OF THE BANK'S RESERVE. 



323 



' apprehension minimum ' : no abstract argument; 
and no mathematical computation will teach it to 
us. And we cannot expect that they should. 
Credit is an opinion generated by circumstances 
and varying with those circumstances. The state 
of credit at any particular time is a matter of fact 
only to be ascertained like other matters of fact ; 
it can only be known by trial and inquiry. And 
in the same way, nothing but experience can tell 
us what amount of * reserve' will create a diffused 
confidence; on such a subject there is no way of 
arriving at a just conclusion except by incessantly 
watching the public mind, and seeing at each 
juncture how it is affected. 

Of course in such a matter the cardinal rule to 
be observed is, that errors of excess are innocuous 
but errors of defect are destructive. Too much 
reserve only means a small loss of profit, but too 
small a reserve may mean ' ruin/ Credit may be at 
once shaken, and if some terrifying accident happen 
to supervene, there may be a run on the Banking 
department that may be too much for it, as in 1857 
and 1866, and may make it unable to pay its way 
without assistance — as it was in those years. 

And the observance of this maxim is the more 
necessary because the ' apprehension minimum' is 
not always the same. On the contrary, in times 



324 THE PRINCIPLES WHICH SHOULD REGULATE 

when the public has recently seen the Bank of 
England exposed to remarkable demands, it is 
likely to expect that such demands may come again. 
Conspicuous and recent events educate it, so to 
speak ; it expects that much will be demanded 
when much has of late often been demanded, and 
that little will be so, when in general but little has 
been so. A bank like the Bank of England must 
always, therefore, be on the watch for a rise, if I 
may so express it, in the apprehension minimum ; 
it must provide an adequate fund not only to allay 
the misgivings of to-day, but also to allay what 
may be the still greater misgivings of to-morrow. 
And the only practical mode of obtaining this object 
is to keep the actual reserve always in advance of 
the minimum ' apprehension ' reserve. 

And this involves something much more. As 
the actual reserve is never to be less, and is always, 
if possible, to exceed by a reasonable amount the 
' minimum' apprehension reserve, it must when the 
Bank is quiet and taking no precautions very con- 
siderably exceed that minimum. All the precau- 
tions of the Bank take time to operate. The 
principal precaution is a rise in the rate of discount, 
and such a rise certainly does attract money from 
the Continent and from all the world much faster 
than could have been anticipated. But it does not 



THE AMOUNT OF THE BANK'S RESERVE. 325 

act instantaneously ; even the right rate, the ulti- 
mately attractive rate, requires an interval for its 
action, and before the money can come here. And 
the right rate is often not discovered for some time. 
It requires several ' moves/ as the phrase goes, 
several augmentations of the rate of discount by 
the Bank, before the really effectual rate is reached, 
and in the mean time bullion is ebbing away and 
the • reserve' is diminishing. Unless, therefore, in 
times without precaution the actual reserve exceed 
the ' apprehension minimum ' by at least the 
amount which may be taken away in the inevitable 
interval, and before the available precautions begin 
to operate, the rule prescribed will be infringed, 
and the actual reserve will be less than the ' appre- 
hension ' minimum. In time the precautions taken 
may attract gold and raise the reserve to the 
needful amount, but in the interim the evils may 
happen against which the rule was devised, 
diffused apprehension may arise, and then any 
unlucky accident may cause many calamities. 

I may be asked, ' What does all this reasoning 
in practice come to ? At the present moment how 
much reserve do you say the Bank of England 
should keep ? state your recommendation clearly (I 
know it will be said) if you wish to have it attended 
to/ And I will answer the question plainly, though 



326 THE PRINCIPLES WHICH SHOULD REGULATE 

in so doing there is a great risk that the principles 
I advocate may be in some degree injured through 
some mistake I may make in applying them. 

I should say that at the present time the mind 
of the monetary world would become feverish and 
fearful if the reserve in the Banking department 
of the Bank of England went below 10,000,000/. 
Estimated by the idea of old times, by the idea 
even of ten years ago, that sum, I know, sounds 
extremely large. My own nerves were educated 
to smaller figures, because I was trained in times 
when the demands on us were less, when neither 
was so much reserve wanted nor did the public 
expect so much. But I judge from such observa- 
tions as I can make of the present state of men's 
minds, that in fact, and whether justifiably or not, 
the important and intelligent part of the pub- 
lic which watches the Bank reserve becomes 
anxious and dissatisfied if that reserve falls below 
10,000,000/. That sum, therefore, I call the 
'apprehension minimum' for the present times. 
Circumstances may change and may make it less 
or more, but according to the most careful esti- 
mate I can make, that is what I should call it now. 

It will be said that this estimate is arbitrary and 
these figures are conjectures. I reply that I only 
submit them for the judgment of others. The 



THE AMOUNT OF THE BANK'S RESERVE. 327 

main question is one of fact — Does not the public 
mind begin to be anxious and timorous just where 
I have placed the apprehension point ? and the 
deductions from that are comparatively simple 
questions of mixed fact and reasoning. The 
final appeal in such cases necessarily is to those 
who are conversant with and who closely watch 
the facts. 

I shall perhaps be told also that a body like the 
Court of the Directors of the Bank of England 
cannot act on estimates like these : that such a 
body must have a plain rule and keep to it. I say 
in reply, that if the correct framing of such esti- 
mates is necessary for the good guidance of the 
Bank, we must make a governing body which can 
correctly frame such estimates. We must not 
suffer from a dangerous policy because we have 
inherited an imperfect form of administration. I 
have before explained in what manner the govern- 
ment of the Bank of England should, I consider, 
be strengthened, and that government so strength- 
ened would, I believe, be altogether competent to 
a wise policy. 

Then I should say, putting the foregoing rea- 
soning into figures, that the Bank ought never to 
keep less than 11,000,000/. or 11,500,000/., since 
experience shows that a million, or a million and 



328 THE AMOUNT OF THE BANK'S RESERVE. 

a half, may be taken from us at any time. I 
should regard this as the practical minimum at 
which, roughly of course, the Bank should aim, 
and which it should try never to be below. And, 
in order not to be below 11,500,000/., the Bank 
must begin to take precautions when the reserve 
is between 14,000,000/. and 15,000,000/. ; for ex- 
perience shows that between 2,000,000/. and 
3,000,000/. may, probably enough, be withdrawn 
from the Bank store before the right rate of 
interest is found which will attract money from 
abroad, and before that rate has had time to 
attract it. When the reserve is between 
14,000,000/. and 15,000,000/., and when it begins 
to be diminished by foreign demand, the Bank of 
England should, I think, begin to act, and to raise 
the rate of interest. 



329 



CHAPTER XIII. 



CONCLUSION. 



I know it will be said that in this work I have 
pointed out a deep malady, arid only suggested a 
superficial remedy. I have tediously insisted that 
the natural system of banking is that of many 
banks keeping their own cash reserve, with the 
penalty of failure before them if they neglect it. 
I have shown that our system is that of a single 
bank keeping the whole reserve under no effectual 
penalty of failure. And yet I propose to retain 
that system, and only attempt to mend and pal- 
liate it. 

I can only reply that I propose to retain this 
system because I am quite sure that it is of no 
manner of use proposing to alter it. A system of 
credit which has slowly grown up as years went 
on, which has suited itself to the course of busi- 
ness, which has forced itself on the habits of men, 



330 



CONCLUSION. 



will not be altered because theorists disapprove of 
it, or because books are written against it. You 
might as well, or better, try to alter the English 
monarchy and substitute a republic, as to alter 
the present constitution of the English money 
market, founded on the Bank of England, and 
substitute for it a system in which each bank shall 
keep its own reserve. There is no force to be 
found adequate to so vast a reconstruction, and so 
vast a destruction, and therefore it is useless pro- 
posing them. 

No one who has not long considered the 
subject can have a notion how much this depend- 
ence on the Bank of England is fixed in our 
national habits. I have given so many illustrations 
in this book that I fear I must have exhausted my 
reader's patience, but I will risk giving another. 
I suppose almost everyone thinks that our system 
of savings' banks is sound and good. Almost 
everyone would be surprised to hear that there is 
any possible objection to it. Yet see what it 
amounts to. By the last return the savings' banks 
— the old and the Post Office together — contain 
about 60,000,000/. of deposits, and against this 
they hold in the funds securities of the best kind. 
But they hold no cash whatever. They have 
of course the petty cash about the various 



CONCLUSION. 



331 



branches necessary for daily work. Bat of cash 
in ultimate reserve — cash in reserve against a 
panic — the savings' banks have not a sixpence. 
These banks depend on being able in a panic to 
realise their securities. But it has been shown 
over and over again, that in a panic such securities 
can only be realised by the help of the Bank of 
England — that it is only the Bank with the ulti- 
mate cash reserve which has at such moments any 
new money, or any power to lend and act. If 
in a general panic there were a run on the savings' 
banks, those banks could not sell 100,000/. of 
Consols without the help of the Bank of England; 
not holding themselves a cash reserve for times 
of panic, they are entirely dependent on the one 
Bank which does hold that reserve. 

This is only a single additional instance beyond 
the innumerable ones given, which shows how 
deeply our system of banking is fixed in our ways 
of thinking. The Government keeps the money 
of the poor upon it, and the nation fully approves 
of their doing so. No one hears a syllable of ob- 
jection. And every practical man — every man 
who knows the scene of action — will agree that 
our system of banking, based on a single reserve 
in the Bank of England, cannot be altered, 
or a system of many banks, each keeping its 



332 



CONCLUSION. 



own reserve, be substituted for it. Nothing but 
a revolution would effect it, and there is nothing 
to cause a revolution. 

This being so, there is nothing for it but to 
make the best of our banking system, and to work 
it in the best way that it is capable of. We can 
only use palliatives, and the point is to get the 
best palliative we can. I have endeavoured to 
show why it seems to me that the palliatives 
which I have suggested are the best that are at 
our disposal. 

I have explained why the French plan will not 
suit our English world. The direct appointment 
of the Governor and Deputy-Governor of the 
Bank of England by the executive Government 
would not lessen our evils or help our difficulties. 
I fear it would rather make both worse. But 
possibly it may be suggested that I ought to ex- 
plain why the American system, or some modifica- 
tion, would not or might not be suitable to us. 
The American law says that each national bank 
shall have a fixed proportion of cash to its 
liabilities (there are two classes of banks, and two 
different proportions ; but that is not to the 
present purpose), and it ascertains by inspec- 
tors, who inspect at their own times, whether the 
required amount of cash is in the bank or not. 



CONCL US ION. 



333 



It may be asked, could nothing like this be 
attempted in England ? could not it, or some 
modification, help us out of our difficulties ? As 
far as the American banking system is one of many 
reserves, I have said why I think it is of no use con- 
sidering whether we should adopt it or not. We 
cannot adopt it if we would. The one-reserve 
system is fixed upon us. The only practical 
imitation of the American system would be to 
enact that the Banking department of the Bank of 
England should always keep a fixed proportion — 
say one-third of its liabilities — in reserve. But, as 
we have seen before, a fixed proportion of the 
liabilities, even when that proportion is voluntarily 
chosen by the directors, and not imposed by law, 
is not the proper standard for a bank reserve. 
Liabilities may be imminent or distant, and a fixed 
rule which imposes the same reserve for both will 
sometimes err by excess, and sometimes by defect. 
It will waste profits by over-provision against 
ordinary danger, and yet it may not always save 
the bank ; for this provision is often likely enough 
to be insufficient against rare and unusual dangers. 
But bad as is this system when voluntarily 
chosen, it becomes far worse when legally and 
compulsorily imposed. In a sensitive state of the 
English money market the near approach to the 



334 



CONCLUSION. 



legal limit of reserve would be a sure incentive to 
panic ; if one-third were fixed by law, the moment 
the banks were close to one-third, alarm would 
begin, and would run like magic. And the fear 
would be worse because it would not be unfounded 
— at least, not wholly. If you say that the Bank 
shall always hold one-third of its liabilities as a 
reserve, you say in fact that this one-third shall 
always be useless, for out of it the Bank cannot 
make advances, cannot give extra help, cannot do 
what we have seen the holders of the ultimate 
reserve ought to do and must do. There is no 
help for us in the American system ; its very 
essence and principle are faulty. 

We must therefore, I think, have recourse to 
feeble and humble palliatives such as I have sug- 
gested. With good sense, good judgment, and 
good care, I have no doubt that they may be 
enough. But I have written in vain if I require 
to say now that the problem is delicate, that the 
solution is varying and difficult, and that the result 
is inestimable to us all. 



APPENDIX. 



NOTE A. 

LIABILITIES AND CASH RESERVE OF THE CHIEF 
BANKING SYSTEMS. 

The following is a comparison of the liabilities to the 
public, and of the cash reserve, of the banking systems 
of the United Kingdom, France, Germany, and the 
United States. For the United Kingdom the figures 
are the most defective, as they only include the deposits 
of the Bank of England, and of the London joint stock 
banks, and the banking reserve of the Bank of England, 
which is the only cash available against these liabilities 
is also the only cash reserve against the similar liabili- 
ties of the London private banks, the provincial English 
banks, and the Scotch and Irish banks. In the case of 
England, therefore, the method of comparison exhibits 
a larger proportion of cash to liabilities than what really 

exists. 

(i) English Banking. 

Liabilities, £ 

Deposits of Bank of England, less estimated 
Joint Stock Bank balances, at December 31, 

1872 29,000^030 

Deposits of London Joint Stock Banks at De- 
cember 31, 1872 (see ' Economist,' February 

8, 1873) 91,000,000 

Total liabilities . . . 120,000,000 



336 APPENDIX. 

Reserve of Cash. £ 

Banking Reserve in Bank of England . . . 13,500,000 

Making proportion of cash reserve to liabilities to trie public 
about n*2 per cent. 

(2) Bank of France (February, 1873). 

Liabilities. £ 

Circulation ....... 110,000,000 

Deposits 15,000,000 

Total liabilities . . . 125,000,000 
• • 

Reserve of Cash. 
Coin and bullion in hand .... 32,000,000 

Making proportion of cash reserve to liabilities to the public 
about 25 per cent. 

(3) Banks of Germany (January, 1873). 

Liabilities. £ 

Circulation 63,000,000 

Deposits 8,000,000 

Acceptances and Indorsements . . . 17,000,000 

Total liabilities . . . 88,000,000 

Reserve of Cash. £ 

Cash in hand . . . . . . . 41,000,000 

Making proportion of cash reserve to liabilities to the public 
about 47 per cent. 

4) National Banks of United States (October 3, 1872). 

Liabilities. £ 

Circulation 67,000,000 

Deposits 145,000,000 

Total liabilities • . 212,000,000 



APPENDIX. 



337 



Reserve of Cash. 
Coin and legal lenders in hand . 



£ 

26,000,000 



Making proportion of cash reserve to liabilities to the public 
about 1 2 *3 per cent. 

SUMMARY. 





Liabilities- to the 
public* 


Cash held. 


Proportion 
of cash to 
liabilities 
per cent. 


Bank of England and ) 
London Joint Stock > 
Banks . . . ; 

Bank of France 

Banks of Germany . 

National Banks of ) 
United States. . J 


£ 

120,000,000 

125,000,000 
88,000,000 

212,000,000 


£ 

13,500,000 

32,000,000 
41.000,000 

26,000,000 


11*2 

25-0 
47-0 

12-3 



NOTE B. 

EXTRACT FROM EVIDENCE GIVEN BY MR. ALDERMAN 
SALOMONS BEFORE HOUSE OF COMMONS SELECT COM- 
MITTEE IN I858. 

1 146. Chairman.} The effect upon yourselves of the 
pressure in November was, I presume, to induce you to 
increase your reserve in your own hands, and also to in- 
crease your deposits with the Bank of England ? — Yes, 
that was so ; but I wish to tell the Committee that that 
•vas done almost entirely by allowing the bills of exchange 
which we held to mature, and not by raising any money, 
or curtailing our accommodation to our customers. Per- 
haps it may be interesting to the Committee to know 
15 



338 APPENDIX. 

that on the nth of November we held discounted bills 
for brokers to the amount of 5,623,000/. Out of those 
bills, 2,800,000/. matured between the 1 ith of November 
and the 4th of December, and 2,000,000/. more between 
the 4th of December and the 31st. So that about 
5,000,000/. of bills matured between the nth of Novem T 
ber and the 31st of December; consequently we were 
prepared, merely by the maturing of our bills of exchange, 
for any demands that might possibly come upon us. 

1147' I understand you to say that you did not with- 
draw your usu^ 1 accommodation from your own cus- 
tomers, but that you ceased to have in deposit with the 
bill-brokers so large a sum of money as you had before ? 
— Not exactly that ; the bills which we had discounted 
were allowed ic mature, and we discounted less ; we 
kept a large reserve of cash. 

1,148. That is to say, you withdrew from the commer- 
cial world a part of that accommodation which you had 
previously given, and at the same time you increased 
your deposits with the Bank of England ? — Yes, our de- 
posits with the Bank of England were increased. We 
did not otherwise withdraw accommodation. 

1 149. Mr. Wegaelin.~\ Had you any money at call 
with the bill-brokers ? — A small amount ; perhaps about 
500,000/. or less, which we did not call in. 

1 1 50. Chair man. ~\ What I understand you to say is, 
that the effect of the commercial pressure upon you was 
to induce you upon the whole to withdraw from com- 
merce an amount of accommodation which in other times 
you had given ?nd at the same time to increase your 
deposits with the Bank of England ? — So far only as 
ceasing to discount with strangers, persons not having 
current accounts with us. 



APPENDIX. 



3j9 



1 1 51. Or to give the same amount to the bill-broker? 
■ — For a while, instead of discounting for brokers and 
strangers, we allowed our bills to mature, and remained 
quiescent with a view to enable us to meet any demand 
that might be made on ourselves. 

1152. Except what you felt bound to your own cus- 
tomers to continue to give, you ceased to make advances ? 
— Quite so ; perhaps I might say at the same time, that 
besides a large balance which we kept at the Bank of 
England, which of course was as available as in our own 
tills, we increased our notes in our tills at the head office 
and at all the branches. 

1 1 53. I suppose at that time large sales of public 
securities were made by the London joint stock banks, 
which securities w r ere purchased by the public ? — It is 
understood that some joint stock and other banks sold, 
but I believe it is quite certain that the public purchased 
largely, because they always purchase when the funds fall. 

1154. Are you prepared to give the Committee any 
opinion of your own as to the effect, one way or the other, 
which the system of the joint stock banks may have pro- 
duced with regard to aggravating or diminishing the 
commercial pressure in the autumn of last year ? — I 
should state, generally, that the joint stock banks, as well 
as all other banks, in London, by collecting money from 
those who had it to spare, must of necessity have 
assisted, and could not do otherwise than assist com- 
merce, both then and at all other times. 

1155. You say that your discounts, either at your 
own counter or through the bill-brokers, are ordinarily 
very large, but that at the time of severest pressure you 
contracted them so far as you thought was just to your 
own immediate customers ? — Yes ; but the capital was 



340 



APPENDIX. 



still there, because it was at the Bank of England, and 
it was capable of being used for short periods ; if we did 
not want it, others might have used it. 

1 1 56. Mr. Weguelin.~\ In fact, it was used by the 
Bank of England ? — Undoubtedly ; I should suppose so ; 
there is no question about it. 

1 1 57. You, of course, felt quite certain that your 
deposits in the Bank of England might be had upon 
demand ? — We had no doubt about it. 

1158. You did not take into consideration the effect 
of the law of 1844, which might have placed the Banking 
Department of the Bank of England in such a position 
as not to be able to meet the demands of its depositors ? 
— I must say that that never gave us the smallest 
concern. 

1 1 59. You therefore considered that, if the time should 
arrive, the Government would interfere with some measure 
as they had previously done to enable the Bank to meet 
the demands upon it ? — We should always have thought 
that if the Bank of England had stopped payment, all 
the machinery of Government would have stopped with 
it, and we never could have believed that so formidable 
a calamity would have arisen if the Government could 
have prevented it. 

1 160. Chairman.~\ The notion of the convertibility of 
the note being in danger never crossed your mind ? — 
Never for a moment ; nothing of the kind. 

1 161. Mr. Weguelin.~\ I refer not to the convertibility 
of the note, but to the state of the Banking Department 
of the Bank of England ? — If we had thought that there 
was any doubt whatever about it, we should have taken 
our bank-notes and put them in our own strong chest. 
We could never for a moment believe an event of that 
kind as likely to happen. 



APPENDIX. 34 r 

1 162. Therefore you think that the measure taken by 
the Government, of issuing a letter authorising the Bank 
of England to increase their issues of notes upon securi- 
ties, was what was generally expected by the commercial 
world, and what in future the commercial world would 
look to in such a conjunction of circumstances ? — We 
looked for some measure of that nature. That, no 
doubt, was the most obvious one. We had great doubts 
whether it would come when it did, until the very last 
moment. 

1 163. Have you ever contemplated the possibility of 
the Bank refusing to advance, under circumstances simi- 
lar to those which existed in November, 1857, upon good 
banking securities ? — Of course I have, and it is a very 
difficult question to answer as to what its effect might 
be ; but the notion appears to me to be so thoroughly 
ingrained in the minds of the commercial world, that 
whenever you have good security it ought to be con- 
vertible at the Bank in some shape or way, that I have 
very great doubt indeed whether the Bank can ever take 
a position to refuse to assist persons who have good 
commercial securities to offer. 

1 164. Mr. Cay ley. ~\ When you say that you have come 
to some fresh arrangement with regard to your allow- 
ance of interest upon deposits, do you speak of your- 
selves as the London and Westminster Bank, or of some 
of the other banks in combination with yourselves ? — I 
think all the banks have come to an understanding that 
it is not desirable, either for their proprietors or for the 
public, to follow closely at all times the alterations of 
the Bank. I believe it is understood amongst them all 
that they do not intend following that course in future. 

1 165. Is that from a feeling that it is rather dangerous 



342 



APPENDIX. 



under particular circumstances? — I cannot admit as to 
its being dangerous, but there can be no doubt of this, 
that there is a notion in the public mind which we ought 
not to contend against, that when you offer a high rate 
of interest for money, you rather do it because you want 
the person's money, than because you are obeying the 
market rate ; and I think it is desirable that we should 
show that if persons wish to employ their money, and 
want an excessive rate, they may take it away and em- 
ploy it themselves. 

1166. You think that there is now a general under- 
standing amongst the banks which you have mentioned, 
to act upon a different principle from that on which they 
acted during last October and November ? — I think I 
may say that I know that to be the case. 

1 167. Was not it the fact that this system of giving so 
high a rate of interest upon money at call commenced 
very much with the establishment of some banks during 
the last year or two, which, instead of demanding 10 
days' or a month's notice, were willing to allow interest 
upon only three days' notice ; did not that system begin 
about two years ago ? — I do not think it began with the 
new banks ; I think it began with one of the older banks ; 
I know that as regards my own bank, that we were 
forced into it ; I forgot to say, that with regard to our- 
selves in taking money on deposit, the parties must 
leave the money a month, or they lose interest. We do 
not take money from any depositor at interest unless 
upon the understanding and condition that it remains a 
month with us ; he may withdraw it within the month, 
but then he forfeits interest ; it will not carry interest 
unless it is with us a month, and then it is removable on 
demand without notice. 



APPENDIX. 



343 



1168. Is it or is it not a fact that some of the banks 
pay interest upon their current accounts ? — Yes, I think 
most of the new banks do so ; and the Union Bank of 
London does it. 

1 169. At a smaller rate than upon their deposits, I 
presume ? — I think at a smaller rate, but I believe it is 
a fixed rate on the minimum balance for some period, 
either six months or one month, I do not exactly know 
the period. I think I ought to add (and I believe it is 
the case with all the banks) that the London and West- 
minster Bank, from the day of its first institution until 
the present day, has never re-discounted a bill. No bill 
has ever left our bank unless it has been for payment. 

1 170. Is not that generally the case with the London 
joint stock banks ? — I believe it is the case. 

1 171. Mr. Wegtielm.'] But you some f *mes lend money 
upon bills deposited with you by bill-brokers ? — Yes. 

1 172. And you occasionally call in that money and 
re-deliver those securities ? — Yes ; but that we do to a 
very small extent. 

1 173. Is not that equivalent to a re-discount of bills ? 
— No ; the discount of a bill and the lending money on 
bills are very different things. When v - discount a bill, 
that bill becomes our property ; it is in our control, and 
we keep it and lock it up until it falls due ; but when 
brokers come to us and want to borrow, say 50,000/. on 
a deposit of bills, and we let them have the money and 
afterwards return those bills to them and we get back 
our money, surely that is not a re-discount. 

1 174. When you want to employ your money for a 
short period, do you not frequently take bills of long 
date, and advance upon them ? — But that is not a re- 
discount on our part. Very often brokers in borrowing 



344 



APPENDIX. 



money send in bills of long date, and afterwards we call 
in that loan ; but that is no more a re-discount than 
lending money upon consols and calling in that money 
again. It is not an advance of ours ; we do not seek it ; 
they come to us and borrow our money, and give us a 
security ; when we want our money we call for that 
money, and return their security. Surely that is not a 
re-discount. 

1 175. Mr. Hankey.~\ Is there not this clear distinction 
between returning a bill on which you have made an 
advance and discounting a bill, that if you have dis- 
counted a bill your liability continues upon the bill until 
that bill has come to maturity ? — Yes. 

1 176. In the other case you have no further liability 
whatever ? — Certainly. 

1 177. Should you not consider that a very important 
distinction ? — I think it is an important distinction. 
Take this case : suppose a party comes to us and bor- 
rows 50,000/., and we lend it him, and when the loan 
becomes due we take our money back again. Surely 
that is not a discount on our part. 

1 178. Is there not this distinction, that if you re- 
discount you may go on pledging the liability of your 
bank to an almost unlimited amount, whereas in the 
other case you only get back that money which you have 
lent ? — Undoubtedly. 

1 179. Mr. Cay ley. ~\ The late Chancellor of the Ex- 
chequer stated before the adjournment, in a speech in 
the House of Commons, that during the Monday, Tues- 
day, Wednesday, and Thursday of the panic, the Bank 
was almost, if not entirely, the only body that discounted 
commercial bills; how can you reconcile that with what you 
have said, that you gave as much accommodation as usual 



APPENDIX. 



345 



to your customers ? — I am not responsible for what the 
Chancellor of the Exchequer said ; I am responsible for 
what I am now stating as to the course of our bank, that 
our advances to our customers on the 31st of December 
were nearly 500,000/. higher than they were on the 31st 
of October. With regard to our not discounting for 
other parties, it was in consequence of the discredit which 
prevailed, that it was necessary we should hold a portion 
of our deposits in order that they should be available in 
case persons called for them ; a certain number of per- 
sons did so ; in the month of November we had a re- 
duction of our deposits, and if we had gone on discount- 
ing for brokers we should have had to go into the market 
ourselves to raise money on our Government securities, 
but we avoided that by not discounting, and leaving our 
money at the Bank of England. 

1 1 80. Then you did not discount as much as usual 
for your customers during that period ? — Yes, we did, 
and more. 

1 181. But not to strangers? — Not to strangers; I 
make a distinction between our transactions with our 
customers, who of course expect us to give accommoda- 
tion, and discounts for brokers, which is entirely volun- 
tary, depending upon our having money to employ. 

1 182. How would it have been if the letter had not 
issued at the last moment ? — That is a question which I 
can hardly answer. 

1 183. What do you mean by that general expression 
of yours ? — It is impossible to predicate what may hap- 
pen in time of panic and alarm. A great alarm prevailed 
certainly amongst the commercial world, and it could 
never have been alleviated, except by some extraordi- 
nary means of relief. We might probably have been in 

15* 



346 



APPENDIX. 



the state in which Hamburg was, where they have no 
bank-notes in circulation. 

1 1 84. Mr. Spooner.~\ What did you mean by the ex- 
pression, ' the last moment ' ? You said that the letter 
came out at the last moment ; the last moment of what ? 
— It was late in the day ; it was a day of great distress. 
For two days there was a great deal of anxiety, and 
everybody expected that there would be some relief; 
and it was when expectation, I suppose, was highly ex- 
cited that the letter came, and it gave relief. 

1 185. Cannot you tell us what your opinion would 
have been, if that last moment had happened to have 
elapsed, and the letter had not come ? — It is very diffi- 
cult to say ; it is too much to say that it could not have 
been got over. There can be no doubt whatever that 
what created the difficulty existed out of London, and 
not in it ; and therefore it is much more difficult for me 
to give an opinion. I believe that the banking interest, 
both private and joint stock, was in a perfectly sound 
condition, and able to bear any strain which might have 
been brought upon it in London. 

1 186. Mr. Hankey.~\ Can you give the Committee any 
idea as to what proportion of deposits you consider 
generally desirable to keep in reserve ? — You must be 
very much guided by circumstances. In times of alarm, 
when there are failures, of course all bankers strengthen 
their reserves ; our reserve then is larger. In times of 
ordinary business we find, both as regards our deposits 
at interest as well as those which are not at interest, that 
there is a constant circulation ; that the receipts of money 
very nearly meet the payments. 

1 187. You probably keep at all times a certain amount 
of your deposits totally unemployed ; in reserve ? — Yes< 



APPENDIX. 



347 



1188. In a normal state of commercial affairs, is there 
any fixed proportion, or can you give the Committee 
any idea of what you would consider about a fair and 
desirable proportion which should be so kept unem- 
ployed ? — I think the best idea which I can give upon 
that subject is to give our annual statement, or' balance 
sheet, for the 31st of December. 

1 189. Does that show what amount of unemployed 
money you had on that day ? — Yes. I will put in a 
statement, which perhaps will be the best means of meet- 
ing the question, showing the cash in hand on the 30th 
of June and the 3 1 st of December in every year, as shown 
by our published accounts, together with our money at 
call and our Government securities ; that will be perhaps 
the best and most convenient way of giving the informa- 
tion you desire to have. (See Table on next page.) 

1 190. Do you consider that when your deposits are 
materially on the increase it is necessary to keep a larger 
amount of money in reserve than you would keep at 
other times ? — I may say that, as a general rule, our 
reserve would always bear some proportion to our 
deposits. 

1 191. Do you employ your money in the discounting 
<*f bills for other persons than your own customers ? — 
Discount brokers. 

1 192. Only to discount brokers ? — Yes. 

1 193. Not to strangers who are in the habit of bring- 
ing you in bills ; commercial houses ? — I should say 
generally not. We have one or two houses for whom 
we discount who have not accounts with us as bankers, 
but generally we do not discount except for our custom- 
ers or for bill-brokers. 

1 194. Do you consider that any advantage can arise 



348 



APPENDIX. 



Total Lodgments with London and Westminster Bank ; also Am Mint 
of Cash in Hand, Moneys with Bill-Brokers at Call, and Government 
Securities held by the Bank. 



DATE. 



31 December 1845 
„ 1846 

1847 

30 June 1848 

31 December ,, 

30 June 1849 

31 December ,, 

30 June 1850 

31 December ,, 

30 June 1 85 1 

31 December ,, 

30 June 1852 

31 December ,, 

30 June 1853 

31 December ,, 

30 June 1854 

31 December ,, 

30 June 1855 

31 December ,, 

30 June 1856 

31 December ,, 

30 June 1857 

31 December , 



Deposits. 



£ 

3.590,014 
3,280,864 

2,733,753 
3,170,118 
3,089,659 
3,392,857 
3,680,623 
3,821,022 
3,969,648 

4,4i4,i79 

4,677,298 

5,245,135 
5,581,706 
6,219, 817, 
6,259,540: 
6,892,47o i 

7,177,244; 
8,166,553 

8,744,095, 
11,170,010! 
11,438,461 
13,913,058 
13,889,021 



Cash in 
Hand. 



Money at 
Call. 



£ 

563,072 
634,575 
721,325 
588,871 
645,468 
552,642 

6S6,76i 
654,649 
566,039 
691,719 
, 653,946', 

! 861,778 
i 855,057; 

904,252! 

791,699: 

827,397! 
694,309; 
722,2431 
847,856 
906,876 

1, 11909 1 

967,078 
2,226,441 



Government 
Securities 



£ 

628,500 
423,060 
350,10s 

159,724 
176,824 
246,494 

263,577 
258,177 

334,9S2 
424,195! 
37S,337i 
206,687 

397,° s 7 
499,467| 
677,392: 
917,557! 
486,400 
483,890' 

451,575 
601,800 
432,000 
687,730 
1,115,883 



I 



£ 

1,039,745 

938,717 

791,899 

1,295,047 

1,189,213 

964, 800 

973,691 
972,055 
1,089,794 
1,054,018 
1,054,018 
1,054,018 

I »"9»477 

1,218,852 
1,468,902 
1,457,415 
1,451,074 
1,754,074 
1,949,074 
1,980,489 
2,922,625 
3,353.179 
,582,797 



TOTAL. 



£ 

2,231,317 
1,996,352 
1,863,332 
2,043,642 
2,011,505 
1,763,936 
1,224,029 
1,884,881 
1,990,815 
2,169.932 

2,080,301 
2,122,483 
2,371,621 

2,622,571 

2,937,993 
3.202,369 
2,631,783 

2,960,207 

3,248,505 
3.489,165 
4,474,216 
5,007,987 
6,925,121 



to the public by the Bank of England advancing to a 
greater extent than can be considered strictly prudent on 
the soundest principle of banking, under the idea of their 
affording aid to the commercial world ? — As I said 
before, as long as there are good bills in circulation, that 
is, bills about which there would be no doubt of their 
being paid at maturity, there should be some means by 
which those bills could be discounted. 

1 195. And do you think that it is part of the functions 



APPENDIX. 



349 



of the Bank of England to discount a bill for anybody, 
merely because the party holding the bill wishes to con- 
vert it into cash ? — As I said before, the Bank of England 
will have great difficulty in getting rid of that inconveni- 
ent idea which there is in the mind of the public, that 
the Bank of England is something more than an ordinary 
joint stock bank. I think it must depend very much 
upon circumstances whether you can or cannot refuse 
the discount of good bills which are offered to you. 



NOTE C. 



STATEMENT OF CIRCULATION AND DEPOSITS OF THE 
BANK OF DUNDEE AT INTERVALS OF TEN YEARS BE- 
TWEEN 1764 AND 1864. 



Year. 


Circulation. 


Deposits. * 




£ 


£ 


1764 


30,39s 


— 


1774 


27,670 


— 


I784 


56,342 


— 


1794 


50,254 


48,809 


1804 


54,096 


157,821 


1814 


46,627 


445,066 


1824 


29,675 


343 ? 948 


1834 


26,467 


563,202 


1844 


27,504 


535,253 


1854 


40,774 


705,222 


1864 


41,118 


684,898 



*The Bank did not begin to receive deposits until 1792, in 
frhich year they amounted to 35,944/. 



350 APPENDIX. 

NOTE D. 

MEETING OF THE PROPRIETORS OF THE BANK OF 

ENGLAND. 

September 13, 1866. 

(Prom ^Economist,' September 22, 1866.) 

A General Court of the Bank of England was held at 
the Bank at twelve o'clock on the 13th instant, for the 
purpose of declaring a dividend for the past half-year. 

Mr. Launcelot Holland, the Governor of the Bank, 
who presided upon the occasion, addressed the propri- 
etors as follows : — This is one of the quarterly general 
courts appointed by our charter, and it is also one of our 
half-yearly general courts, held under our bye-laws, for 
the purpose of declaring a dividend. From a statement 
which I hold in my hand it appears that the net profits 
of the Bank for the half-year ending on the 31st of 
August last amounted to 970,014/. 17s. \od. ; making 
the amount of the rest on that day 3,981,783/. \Zs. \\d. ; 
and after providing for a dividend at the rate of 6/. \os. 
per cent., the rest will stand at 3,035,838/. \Zs. \\d. 
The court of directors, therefore, propose that a half- 
yearly dividend of interest and profits, to the amount of 
61. 10s. per cent. , without deduction on account of income 
tax, shall be made on the 10th of October next. That 
is the proposal I have now to lay before the general 
court ; but as important events have occurred since we 
last met, I think it right I should briefly advert to them 
upon this occasion. A great strain has within the last 
few months been put upon the resources of this house, 
and of the whole banking community of London ; and I 



APPENDIX. 



35* 



think I am entitled to say that not only this house but 
the entire banking body acquitted themselves most 
honourably and creditably throughout that very trying 
period. Banking is a very peculiar business, and it 
depends so much upon credit that the least blast of sus- 
picion is sufficient to sweep away, as it were, the harvest 
of a whole year. But the manner in which the banking 
establishments generally of London met the demands 
made upon them during the greater portion of the past 
half-year affords a most satisfactory proof of the sound- 
ness of the principles on which their business is conducted. 
This house exerted itself to the utmost — and exerted 
itself most successfully — to meet the crisis. We did not 
flinch from our post. When the storm came upon us, on 
the morning on which it became known that the house of 
Overend and Co. had failed, we were in as sound and 
healthy a position as any banking establishment could 
hold ; and on that day and throughout the succeeding 
week, w r e made advances which would hardly be credited. 
I do not believe that any one would have thought of 
predicting, even at the shortest period beforehand, the 
greatness of those advances. It was not unnatural that 
in this state of things a certain degree of alarm should 
have taken possession of the public mind, and that those 
who required accommodation from the Bank should have 
gone to the Chancellor of the Exchequer and requested 
the Government to empower us to issue notes beyond 
the statutory amount, if we should think that such a 
measure was desirable. But we had to act before we 
could receive any such power, and before the Chancellor 
of the Exchequer was perhaps out of his bed we had 
advanced one-half of our reserves, which were certainly 
thus reduced to an amount which we could not witness 



352 APPENDIX. 

without regret. But we could not flinch from the duty 
which we conceived was imposed upon us of supporting 
the banking community, and I am not aware that any 
legitimate application for assistance made to this house 
was refused. Every gentleman who came here with 
adequate security was liberally dealt with, and if accom- 
modation could not be afforded to the full extent which 
was demanded, no one who offered proper security failed 
to obtain relief from this house. I have perhaps gone a 
little more into details than is customary upon these oc- 
casions, but the times have been unusually interesting, 
and I thought it desirable to say this much in justifica- 
tion of the course adopted by this house of running its 
balances down to a point which some gentlemen may 
consider dangerous. Looking back, however, upon 
recent events, I cannot take any blame to this court for 
not having been prepared for such a tornado as that 
which burst upon us on the nth of May; and I hope 
the court of proprietors will feel that their directors 
acted properly upon that occasion, and that they did their 
best to meet a very extraordinary state of circumstances. 
I have now only to move that a dividend be declared at 
the rate of 61. 10s. per cent, for the past half-year. 

Mr. Hyam said that before the question was put he 
wished to offer a few observations to the court. He 
believed that the statement of accounts which had just 
been laid before them was perfectly satisfactory. He 
also thought that the directors had done their best to 
assist the commercial classes throughout the late mone- 
tary crisis ; but it appeared to him at the same time that 
they were in fault in not having applied at an earlier 
period to the Chancellor of the Exchequer for a suspen- 
sion of the Bank Act. It was well known that the 



APPENDIX, 



353 



demand on the Bank was materially lessened in the 
earlier part of the day, in consequence of a rumour which 
had been extensively circulated that permission to over- 
step the limits laid down in the Act had been granted. 
That concession, however, had only been made after the 
most urgent representations had been addressed to the 
Chancellor of the Exchequer at a late hour in the night, 
and if it had then been refused he felt persuaded that the 
state of affairs would have been much worse on the 
Saturday than it had been on the Friday. The fact was 
that the Act of 1844 was totally unsuited to the present 
requirements of the country, which since that period had 
tripled or quadrupled its commerce ; and he was sorry 
to know that the measure seemed to meet with the ap- 
proval of many of their directors. Any one who read 
the speeches made in the course of the discussion on 
Mr. Watkins' motion must see that the subject called for 
further inquiry ; and he trusted that the demand for that 
inquiry would yet be conceded. 

Mr. Jones said he entirely dissented from the views 
with respect to the Bank Act entertained by the hon. 
proprietor who had just addressed the court. In his 
opinion the main cause of the recent monetary crisis was 
that, while we had bought 275,000,000/. worth of foreign 
produce in the year 1865, the value of our exports had 
only been 165,000,000/. , so that we had a balance against 
us to the amount of 110,000,000/. He believed that the 
Bank acted wisely in resisting every attempt to increase 
the paper currency, and he felt convinced that the work- 
ing classes would be the people least likely to benefit by 
the rise in prices which would take place under such a 
change. 

Mr. Moxon said he should be glad to know what was 



354 



APPENDIX, 



the amount of bad debts made by the Bank during the 
past half-year. It was stated very confidently out of 
doors that during that period the directors had between 
3,000,000/. and 4,000,000/. of bills returned to them. 

The Governor of the Bank. — May I ask what is your 
authority for that statement ? We are rather amused at 
hearing it, and we have never been able to trace any 
rumour of the kind to an authentic source. 

Mr. Moxon continued — Whether the bad debts were 
large or small, he thought it was desirable that they should 
all know what was their actual amount. They had been 
told at their last meeting that the Bank held a great many 
railway debentures ; and he should like to know whether 
any of those debentures came from railway companies 
that had since been unable to meet their obligations. He 
understood that a portion of their property was locked up 
in advances made on account of the Thames Embank- 
ment, and in other ways which did not leave the money 
available for general banking and commercial purposes ; 
and if that were so, he should express his disapproval of 
such a policy. There was another important point to 
which he wished to advert. He was anxious to know 
what was the aggregate balance of the joint stock banks 
in the Bank of England. He feared that some time or 
other the joint stock banks would be in a position to com- 
mand perhaps the stoppage of the Bank of England. If 
that were not so, the sooner the public were fully in- 
formed upon the point the better. But if ten or twelve 
joint stock banks had large balances in the Bank of Eng- 
land, and if the Bank balances were to run very low, 
people would naturally begin to suspect that the joint 
stock banks had more power over the Bank of England 
than they ought to have. He wished further to ask 



APPENDIX. 



355 



whether the directors had of late taken into consideration 
the expediency of paying interest on deposits. He be- 
lieved that under their present mode of carrying on their 
business they were foregoing large profits which they 
might receive with advantage to themselves and to the 
public , and he w r oi^d recommend that they should 
undertake the custody of securities after the system 
adopted by the Bank of France. In conclusion, he pro- 
posed to move three resolutions, for the purpose of pro- 
viding, first, that a list of all the proprietors of Bank 
stock should be printed, with a separate entry of the 
names of all those persons not entitled to vote from the 
smallness of their stock, or from the shortness of time 
during which they held it ; secondly, that a copy of the 
charter of the Bank, with the rules, orders, and bye-laws 
passed for the good government of their corporation, 
should be printed for the use of the shareholders ; and 
thirdly, that auditors should be appointed to make de- 
tailed audits of their accounts. 

Mr. Gerstenberg recommended that the directors 
should take some step for the purpose of preventing the 
spread of such erroneous notions as that which lately 
prevailed on the Continent, that the Bank was about to 
suspend specie payments. 

Mr. W. Botly said he wished to see the directors tak- 
ing into their consideration the expediency of allowing 
interest on deposits. 

Mr. Alderman Salomons said he wished to take that 
opportunity of stating that he believed nothing could be 
more satisfactory to the managers and shareholders of 
joint stock banks than the testimony which the Governor 
of the Bank of England had that day borne to the sound 
and honourable manner in which their business was con- 



356 APPENDIX, 

ducted. It was manifestly desirable that the joint stock 
banks and the banking interest generally should work in 
harmony with the Bank of England ; and he sincerely 
thanked the Governor of the Bank for the kindly manner 
in which he had alluded to the mode in which the join' 
stock banks had met the late monetary crisis. 

The Governor of the Bank said — Before putting the 
question for the declaration of a dividend, I wish to refer 
to one or two points that have been raised by the gentle- 
men who have addressed the court on this occasion. The 
most prominent topic brought under our notice is the 
expediency of allowing interest on deposits ; and upon 
that point I must say that I believe a more dangerous 
innovation could not be made in the practice of the Bank 
of England. The downfall of Overend and Gurney, and 
of many other houses, must be traced to the policy which 
they adopted of paying interest on deposits at call, while 
they were themselves tempted to invest the money so 
received in speculations in Ireland or in America, or at 
the bottom of the sea, where it was not available when 
a moment of pressure arrived. 

Mr. Botly said he did not mean deposits on call. 

The Governor of the Bank of England continued — 
That is only a matter of detail ; the main question is 
whether we ought to pay interest on deposits, and of 
such policy I must express my entire disapproval. Mr. 
Moxon has referred to the amount of our debts, but, as 
I stated when I took the liberty of interrupting him, we 
could never trace the origin of any rumour which prevailed 
upon that subject. As far as it can be said to have ever 
existed it had its origin most probably in the vast amount 
advanced by the Bank. It must, however, be remem- 
bered that we did not make our advances without ample 



APPENDIX. 



357 



security, and the best proof of that is the marvellously 
small amount of bad debts which we contracted. It has 
never been a feature of the Bank to state what was the 
precise amount of those debts ; but I believe that if I 
were to mention it upon the present occasion, it would 
be found to be so inconsiderable that I should hardly 
obtain credence for the announcement I should have to 
make. I am convinced that our present dividend has 
been as honestly and as hardly earned as any that we 
have ever realised ; but it has been obtained by means 
of great vigilance and great anxiety on the part of each 
and all of your directors ; and I will add that I believe 
you would only diminish their sense of responsibility, 
and introduce confusion into the management of your 
business, if you were to transfer to auditors the making 
up of your accounts. If your directors deserve your con- 
fidence they are surely capable of performing that duty, 
and if they do not deserve it you ought not to continue 
them in their present office. With regard to the sup- 
posed lock-up of our capital, I must observe that, with 
14,000,000/. on our hands, we must necessarily invest it 
in a variety of securities ; but there is no ground for 
imagining that our money is locked up and is not avail- 
able for the purpose of making commercial advances. 
We advanced in the space of three months the sum of 
45,000,000/.; and what more than that do you want? 
It has been recommended that we should take charge of 
securities ; but we have found it necessary to refuse all 
securities except those of our customers ; and I believe 
the custody of securities is becoming a growing evil. 
With regard to railway debentures, I do not believe we 
have one of a doubtful character. We have no deben- 
tures except those of first-class railway companies and 



358 



APPENDIX. 



companies which Ave know are acting within their 
Parliamentary limits. Having alluded to those subjects, 
I will now put the motion for the declaration of the 
dividend. 

The motion was accordingly put and unanimously 
adopted. 

The chairman then announced that that resolution 
should be confirmed by ballot on Tuesday next, inas- 
much as the Bank could not, under the provisions of its 
Act of Parliament, declare otherwise than in that form a 
dividend higher than that which it had distributed dur- 
ing the preceding half-year. 

The three resolutions proposed by Mr. Moxon were 
then read ; but they were not put to the meeting, inas- 
much as they found no seconders. 

Mr. Alderman Salomons said that their Governor had 
observed that he thought the payment of interests on 
deposits was objectionable ; and everyone must see that 
such a practice ought not to be adopted by the Bank of 
England. But he took it for granted that the Governor 
did not mean that his statement should apply to joint 
stock banks which he had himself told them had con- 
ducted their business so creditably and so successfully. 

The Governor of the Bank said that what he stated 
was that such a system would be dangerous for the Bank 
of England, and dangerous if carried into effect in the 
way contemplated by Mr. Moxon. 

Mr. P. N. Laurie said he understood the Governor of 
the Bank to say that it would be dangerous to take 
deposits on call, and in that opinion he concurred. 

Mr. Alderman Salomons said that he, too, was of the 
same opinion. 



APPENDIX. 



359 



On the motion of Mr. Alderman Salomons, seconded 
by Mr. Botly. a vote of thanks was passed to the 
Governor and the directors for their able and successful 
management of the Bank during the past half-year, 
and the proceedings then terminated. 



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